True or False: The following statement accurately describes how firms make decisions related to issuing new common stock. If a firm needs additional capital from equity sources once its retained earnings breakpoint is reached, it will have to raise the capital by issuing new common stock. O True: Firms will raise all the equity they can from retained earnings before issuing new common stock, because capital from retained earnings is cheaper than capital raised from issuing new common stock. O False: Firms raise capital from retained earnings only when they cannot issue new common stock due to market conditions outside of their control. Alpha Moose Transporters is considering investing in a one-year project that requires an initial investment of $450,000. To do so, it will have to issue new common stock and will incur a flotation cost of 2.00%. At the end of the year, the project is expected to produce a cash inflow of $595,000. The rate of return that Alpha Moose expects to earn on its project (net of its flotation costs) is (rounded to two decimal places). Sunny Day Manufacturing Company has a current stock price of $33.35 per share, and is expected to pay a per-share dividend of $2.03 at the end of the year. The company's earnings' and dividends' growth rate are expected to grow at the constant rate of 9.40% into the foreseeable future. If Sunny Day expects to incur flotation costs of 6.50% of the value of its newly-raised equity funds, then the flotation-adjusted (net) cost of its new common stock (rounded to two decimal places) should be Alpha Moose Transporters Co.'s addition to earnings for this year is expected to be $745,000. Its target capital structure consists of 50% debt, 5% preferred, and 45% equity. Determine Alpha Moose Transporters's retained earnings breakpoint: $1,572,778 O $1,738,334 O $1,655,556 O $2,069,445
True or False: The following statement accurately describes how firms make decisions related to issuing new common stock. If a firm needs additional capital from equity sources once its retained earnings breakpoint is reached, it will have to raise the capital by issuing new common stock. O True: Firms will raise all the equity they can from retained earnings before issuing new common stock, because capital from retained earnings is cheaper than capital raised from issuing new common stock. O False: Firms raise capital from retained earnings only when they cannot issue new common stock due to market conditions outside of their control. Alpha Moose Transporters is considering investing in a one-year project that requires an initial investment of $450,000. To do so, it will have to issue new common stock and will incur a flotation cost of 2.00%. At the end of the year, the project is expected to produce a cash inflow of $595,000. The rate of return that Alpha Moose expects to earn on its project (net of its flotation costs) is (rounded to two decimal places). Sunny Day Manufacturing Company has a current stock price of $33.35 per share, and is expected to pay a per-share dividend of $2.03 at the end of the year. The company's earnings' and dividends' growth rate are expected to grow at the constant rate of 9.40% into the foreseeable future. If Sunny Day expects to incur flotation costs of 6.50% of the value of its newly-raised equity funds, then the flotation-adjusted (net) cost of its new common stock (rounded to two decimal places) should be Alpha Moose Transporters Co.'s addition to earnings for this year is expected to be $745,000. Its target capital structure consists of 50% debt, 5% preferred, and 45% equity. Determine Alpha Moose Transporters's retained earnings breakpoint: $1,572,778 O $1,738,334 O $1,655,556 O $2,069,445
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
Section: Chapter Questions
Problem 1PS
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Concept explainers
Cost of Capital
Shareholders and investors who invest into the capital of the firm desire to have a suitable return on their investment funding. The cost of capital reflects what shareholders expect. It is a discount rate for converting expected cash flow into present cash flow.
Capital Structure
Capital structure is the combination of debt and equity employed by an organization in order to take care of its operations. It is an important concept in corporate finance and is expressed in the form of a debt-equity ratio.
Weighted Average Cost of Capital
The Weighted Average Cost of Capital is a tool used for calculating the cost of capital for a firm wherein proportional weightage is assigned to each category of capital. It can also be defined as the average amount that a firm needs to pay its stakeholders and for its security to finance the assets. The most commonly used sources of capital include common stocks, bonds, long-term debts, etc. The increase in weighted average cost of capital is an indicator of a decrease in the valuation of a firm and an increase in its risk.
Question
Transcribed Image Text:True or False: The following statement accurately describes how firms make decisions related to issuing new common stock.
If a firm needs additional capital from equity sources once its retained earnings breakpoint is reached, it will have to raise the capital by
issuing new common stock.
O True: Firms will raise all the equity they can from retained earnings before issuing new common stock, because capital from retained
earnings is cheaper than capital raised from issuing new common stock.
O False: Firms raise capital from retained earnings only when they cannot issue new common stock due to market conditions outside of
their control.
Alpha Moose Transporters is considering investing in a one-year project that requires an initial investment of $450,000. To do so, it will have to issue
new common stock and will incur a flotation cost of 2.00%. At the end of the year, the project is expected to produce a cash inflow of $595,000. The
rate of return that Alpha Moose expects to earn on its project (net of its flotation costs) is
(rounded to two decimal places).
Sunny Day Manufacturing Company has a current stock price of $33.35 per share, and is expected to pay a per-share dividend of $2.03 at the end of
the year. The company's earnings' and dividends' growth rate are expected to grow at the constant rate of 9.40% into the foreseeable future. If Sunny
Day expects to incur flotation costs of 6.50% of the value of its newly-raised equity funds, then the flotation-adjusted (net) cost of its new common
stock (rounded to two decimal places) should be
Alpha Moose Transporters Co.'s addition to earnings for this year is expected to be $745,000. Its target capital structure consists of 50% debt, 5%
preferred, and 45% equity. Determine Alpha Moose Transporters's retained earnings breakpoint:
$1,572,778
$1,738,334
$1,655,556
O $2,069,445
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