The Global Advertising Company has a tax rate of 30%. The company can raise debt at a 12% interest rate and the last dividend paid by Global was P0.90. Global's common stock is selling for P8.59 per share, and its expected growth rate in earnings and dividend is 5%. If Global issue new common stock, the flotation cost incurred will be 10%. Global plans to finance all capital expenditures with 30% debt and 70% equity. a. What is Global's weighed average cost of capital if the firm has sufficient retained earnings to fund the equity portion of its capital budget? b. What is Global's weighted average cost of capital if the firm raised the equity portion by selling new shares of stock? c. What is the cost of equity if its retained earnings can cover only 60% of its equity requirements and the rest new issue of common shares will be sold?

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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5. The Global Advertising Company has a tax rate of 30%. The company can raise debt at a
12% interest rate and the last dividend paid by Global was P0.90. Global's common
stock is selling for P8.59 per share, and its expected growth rate in earnings and
dividend is 5%. If Global issue new common stock, the flotation cost incurred will be
10%. Global plans to finance all capital expenditures with 30% debt and 70% equity.
a. What is Global's weighed average cost of capital if the firm has
sufficient retained earnings to fund the equity portion of its capital
budget?
b. What is Global's weighted average cost of capital if the firm raised the
equity portion by selling new shares of stock?
c. What is the cost of equity if its retained earnings can cover only 60% of its
equity requirements and the rest new issue of common shares will be sold?
Transcribed Image Text:5. The Global Advertising Company has a tax rate of 30%. The company can raise debt at a 12% interest rate and the last dividend paid by Global was P0.90. Global's common stock is selling for P8.59 per share, and its expected growth rate in earnings and dividend is 5%. If Global issue new common stock, the flotation cost incurred will be 10%. Global plans to finance all capital expenditures with 30% debt and 70% equity. a. What is Global's weighed average cost of capital if the firm has sufficient retained earnings to fund the equity portion of its capital budget? b. What is Global's weighted average cost of capital if the firm raised the equity portion by selling new shares of stock? c. What is the cost of equity if its retained earnings can cover only 60% of its equity requirements and the rest new issue of common shares will be sold?
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