Question 5

1. A firm has common stock with a market price of $100 per share and an expected dividend of $5.80 per share at the end of the coming year. A new issue of stock is expected to be sold for $96, with $4 per share representing the underpricing necessary in the competitive capital market. Flotation costs are expected to total $2 per share. The dividends paid on the outstanding stock over the past five years are as follows: Dividend $4.00 4.28 Year 1 2 3 4 5 4.58 4.90 5.24 The cost of this new issue of common stock is 2. Given that the cost of common stock is 17 percent, dividends are $1.50 per share and the price of the stock is $12.50 per share, what is the annual growth rate of dividends? 3. What would be the cost of new common stock equity for Tangshan Mining if the firm just paid a dividend of $4.25, the stock price is $55.00, dividends are expected to grow at 8.5 percent indefinitely, and flotation costs are $4.75 per share? 4. A firm has a beta of 1.5. The market retum equals 16 percent and the risk-free rate of return equals 6 percent. The estimated cost of common stock equity is 5. A firm has determined its optimal capital structure which is composed of the following sources and target market value proportions. Target Market Source of Capital Proportions Long-term debt 20% Preferred stock 10 Common stock equity 70 Debt: The firm can sell a 14-year $1,000 par value, 8 percent bond for $960. A flotation cost of 2 percent of the face value would be required. Additionally, the firm's marginal tax rate is 40 percent. Preferred Stock: The firm has determined it can issue preferred stock at $75 per share par value. The stock will pay a $10 annual dividend. The cost of issuing and selling the stock is $4 per share. Common Stock: A firm's common stock is currently selling for $20 per share. The dividend expected to be paid at the end of the coming year is $1.80. Its dividend payments have been growing at a constant rate for the last four years. It is expected that to sell, a new common stock issue must be under-priced $2 per share in floatation costs. Calculate the firm's weighted average cost of capital assuming the firm has exhausted all retained earnings. (use cost of issuing new common stock)