6. Flotation costs and the costs of new debt and equity capital Read each of the following statements, and indicate whether each statement is true or false. Statement True False Firms raise capital from retained earnings only when they cannot issue new common stock due to market conditions outside of Oo their control. One reason that flotation costs associated with the sale of new equity is significantly greater than those associated with the sale of new debt is the difference in number and characteristics of the purchasers of the new securities. The cost of retained earnings and the cost of new common stock are calculated in the same manner, except that the cost of the new shares is based on the value of the firm's share price net of its flotation cost, while the cost of a firm's retained earnings is based solely on the share's expected future cash flows, its current market price, and the expected rate of growth of the firm's earnings and the share's dividends. o o Consider the case of Sunny Day Manufacturing Company: Sunny Day Manufacturing Company has a current stock price of $50 per share, and is expected to pay a per-share dividend of $4.70 at the end of next year. The company's earnings and dividends growth rate are expected to grow at a constant rate of 4.10% into the foreseeable future. If White Lion expects to incur flotation costs of 4.30% 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 6. Flotation costs and the costs of new debt and equity capital Read each of the following statements, and indicate whether each statement is true or false. Statement True False Firms raise capital from retained earnings only when they cannot issue new common stock due to market conditions outside of their control. o O One reason that flotation costs associated with the sale of new equity is significantly greater than those associated with the sale o of new debt is the difference in number and characteristics of the purchasers of the new securities. The cost of retained earnings and the cost of new common stock are calculated in the same manner, except that the cost of the new shares is based on the value of the firm's share price net of its flotation cost, while the cost of a firm's retained earnings is based solely on the share's expected future cash flows, its current market price, and the expected rate of growth of the firm's earnings and the share's dividends. 0 0 13.22% Consider the case of Sunny Day Manufacturing C 15.31% 13.5% Sunny Day Manufacturing Company has a curren next year. The company's earnings and dividends Lion expects to incur flotation costs of 4.30% of t stock (rounded to two decimal places) should be e of $50 per share, and is expected to pay a per-share dividend of $4.70 at the end of te are expected to grow at a constant rate of 4.10% into the foreseeable future. If White f its newly-raised equity funds, then the flotation-adjusted (net) cost of its new common 13.92%
