Module 5, Cost of Capital

1. The current market price of stock is SR 200, and the stock pays an expected dividend of SR8 with a growth rate of 5%. Determine the cost of common equity.

Calcualtion of Common Equity =Dividend per share/Current market value + Growth rate of dividend

=8/200+5%

=4%+5%

=9%

2. A firm borrows money at 15% interest after taxes and pays 10% for equity. The company raises capital in equal proportions, i.e., 70% debt and 30% equity. Determine the Weightage Average Cost of Capital (WACC) of the Firm.

Computation of the weighted average cost of capital:

WACC = weight of equity * cost of equity + weight of debt * cost of debt

= (0.3*10) + (0.70*15)

= 13.5%

3. Determine the cost for a preferred stock that pays annual dividend SR 6, has issue price SR 40, and incurs flotation costs of SR 3 per share.

Cost of preferred stock = D/(P-F)

where D = Dividend,

P= price of preferred stock

F = Flotation costs

= 6/ (40-3)

= 6/37

= 0.162162 or 16.22%

THIS IS THE QUSIUINOS

4. What Is Optimal Capital Structure? What factors determine optimal capital structure?