Cost of new common stock

1. If a firm needs additional capital from equity sources once the retained earnings breakpoint is reached, it will have to raise the capital by issuing new common stock.

a. 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. b. False: Firms raise capital from retained earnings only when they cannot issue new common stock due to market conditions outside of their control

2. Wooten Co. is considering a one-year project that requires an inital investment of $475,000; however, in raising capital, Wooten will incur an additional flotation cost of 2.0%. At the end of the year, the project is expected to produce a cash inflow of $595,000. Determine the rate of return that Wooten expects to earn on the project after flotation costs are taken into account.

a. 18.2% b. 22.8% c. 17.1% d. 19.4%

3. Wooten Co. has a current stock price of $22.35 and is expected to pay a dividend of $2.45 at the end of next year. The company's growth rate is expected to remain constant at 5.2%. If flotation costs represent 5.0% of funds raised what is the flotation-adjusted cost of new common stock?

a. 16.2% b. 13.4% c. 16.7% d. 14.2%

4. Wooten Co.'s addition to earnings for this year is expected to be $420,000. Its target capital structure consists of 50% debt, 5% preferred, and 45% equity. Determine Wooten's retained earnings breakpoint:

a. $886,666 b. $933,333 c. $1,166,666 d. $1,026,666