Answered step by step
Verified Expert Solution
Question
1 Approved Answer
Problem 1116 (Algo) Costs of retained earnings and new common stock [LO11-3] Murray Motor Company wants you to calculate its cost of common stock. During
Problem 1116 (Algo) Costs of retained earnings and new common stock [LO11-3] Murray Motor Company wants you to calculate its cost of common stock. During the next 12 months, the company expects to pay dividends (D1) of $1.40 per share, and the current price of its common stock is $50 per share. The expected growth rate is 4 percent. a. Compute the cost of retained earnings (Ke) Note: Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places. b. If a $4 flotation cost is involved, compute the cost of new common stock (Kn). Note: Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places. Business has been good for Keystone Control Systems, as Indicated by the four-year growth in earnings per share. The earnings have grown from $1.00 to $1.17. a. Determine the compound annual rate of growth in earnings (n=4). Note: Do not round Intermedlate calculations. Input your answer as a percent rounded to 2 decimal places. b. Based on the growth rate determined in part a, project earnings for next year (E1). Note: Do not round Intermedlate calculations. Round your answer to 2 decimal places. c. Assume the dividend payout ratio is 50 percent. Compute D1. Note: Do not round Intermedlate calculations. Round your answer to 2 decimal places. d. The current price of the stock is $10. Using the growth rate (g) from part a and (D1) from part c, compute Ke. Note: Do not round Intermedlate calculations. Input your answer as a percent rounded to 2 declmal places. e. If the flotation cost is $1.50, compute the cost of new common stock (Kn) using growth rate (g) from part a and dividend (D1) from part c. Note: Do not round Intermedlate calculations. Input your answer as a percent rounded to 2 decimal places
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started