Whispering Industries had the following information for the year 2020: Net income: $120,000 Dividends paid to common stockholders: $40,000 Dividends paid to preferred stockholders: $15,000 Common stockholders' equity at the beginning of the year: $500,000 Common stockholders' equity at the end of the year: $650,000 what is Whispering Industries' return on common stockholders' equity? a. 14% b. 18% c. 20% d. 22%

Whispering Industries had the following information for the year 2020: Net income: $120,000 Dividends paid to common stockholders: $40,000 Dividends paid to preferred stockholders: $15,000 Common stockholders' equity at the beginning of the year: $500,000 Common stockholders' equity at the end of the year: $650,000 what is Whispering Industries' return on common stockholders' equity? a. 14% b. 18% c. 20% d. 22%

Pfin (with Mindtap, 1 Term Printed Access Card) (mindtap Course List)

7th Edition

ISBN:9780357033609

Author:Randall Billingsley, Lawrence J. Gitman, Michael D. Joehnk

Publisher:Randall Billingsley, Lawrence J. Gitman, Michael D. Joehnk

Chapter12: Investing In Stocks And Bonds

Section: Chapter Questions

Problem 4FPE: The Castle Company recently reported net profits after taxes of $15.8 million. It has 2.5 million...

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CALCULATING THE WACC Here is the condensed 2019 balance sheet for Skye Computer Company (in thousands of dollars): Skyes earnings per share last year were 3.20. The common stock sells for 55.00. last years dividend (D0) was 2.10, and a flotation cost of 10% would be required to sell new common stock. Security analysts are projecting that the common dividend will grow at an annual rate of 9%. Skyes preferred stock pays a dividend of 3.30 per share, and its preferred stock sells for 30.00 per share. The firms before-lax cost of debt is 10%, and its marginal tax rate is 25%. The firms currently outstanding 10% annual coupon rate, long-term debt sells at par value. The market risk premium is 5%, the risk-free rate is 6%, and Skyes beta is 1.516. The firms total debt, which is the sum of the companys short-term debt and long-term debt, equals 1.2 million. a. Calculate the cost of each capital component, that is, the after-tax cost of debt, the cost of preferred stock, the cost of equity from retained earnings, and the cost of newly issued common stock. Use the DCF method to find the cost of common equity. b. Now calculate the cost of common equity from retained earnings, using the CAPM method. c. What is the cost of new common stock based on the CAPM? (Hint: Find the difference between r1 and rs as determined by the DCF method, and add that differential to the CAPM value for rs.) d. If Skye continues to use the same market-value capital structure, what is the firms WACC assuming that (1) it uses only retained earnings for equity and (2) if it expands so rapidly that it must issue new common stock?
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