Cost of new common equity also known as external capital equity is similar to the cost of retained earnings , except that it is higher than cost of retained earnings. This is because an extra cost known as flotation cost is also incurred in raising new equity, which reduces the net proceed for investment. Thus, cost of issuing new common stock is greater than the cost of retained earnings. Cost of new equity can be calculated by modifying the Discounted Cash Flow formula as below: r e = D 1 P 0 ( 1 − F ) + g Here, Dividend expected to be paid next year is “ D 1 ” Price of the stock today is “ P 0 ” Flotation cost expressed in percentage is “ F ” The company’s cost of retained earnings is 15.5 percent and currently sells its stock for $32. Its expected next dividend is $3.36 and flotation cost of new common equity is 6.5 percent.

Question

Consider the following gasoline sales time series. If needed, round your answers to two decimal digits. Week Sales (1,000s of gallons) 1 17 2 21 3 19 4 23 5 18 6 16 7 20 8 18 9 22 10 20 11 15 12 22 (a) Show the exponential smoothing forecasts using α = 0.1, and α = 0.2. ExponentialSmoothing Week α = 0.1 α = 0.2 13 (b) Applying the MSE measure of forecast accuracy, would you prefer a smoothing constant of α = 0.1 or α = 0.2 for the gasoline sales time series? An smoothing constant provides a more accurate forecast, with an overall MSE of . (c) Are the results the same if you apply MAE as the measure of accuracy? An smoothing constant provides a more accurate forecast, with an overall MAE of . (d) What are the results if MAPE is used? An smoothing constant provides a more accurate forecast, with an overall MAPE of .

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Question

Chapter 11, Problem 11PROB

Summary Introduction

Cost of new common equity also known as external capital equity is similar to the cost of retained earnings, except that it is higher than cost of retained earnings. This is because an extra cost known as flotation cost is also incurred in raising new equity, which reduces the net proceed for investment. Thus, cost of issuing new common stock is greater than the cost of retained earnings.

Cost of new equity can be calculated by modifying the Discounted Cash Flow formula as below:

re=D1P0(1−F)+g

Here,

Dividend expected to be paid next year is “D1”

Price of the stock today is “P0”

Flotation cost expressed in percentage is “F”

The company’s cost of retained earnings is 15.5 percent and currently sells its stock for $32. Its expected next dividend is $3.36 and flotation cost of new common equity is 6.5 percent.

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