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show all steps please CHAPTER 11 In the presence of flotation costs, use the net proceeds in place of the market price Net Proceeds =
show all steps please
CHAPTER 11 In the presence of flotation costs, use the net proceeds in place of the market price Net Proceeds = Sale Price (1 Flotation cost % or Sale Price $ Flotation Costs Methods to calculate the cost of equity: 1) CAPM (see below) 2) DCF: rs=P0D1+g 3) Own-bond-yield-plus-judgmental-risk-premium: rs=rd,BT+judgmentalRP Capital Asset Pricing Model (SML); ri=rRF+i(rMrRF) OR ri=rRF+i(RPM) ri= Expected return on stock i;rrf= risk - free rate of return; i= beta of stock i;rM= Expected return of the market; RP PM= market risk premium rps=PDrd,AT=rd,BT(1TC)WACC=wdrd,AT+wpsrps+wsrsWACC=wdrd,BT(1TC)+wpsrps+wsrs rd,AT= after tax cost of debt; rps= cost of preferred stock rDd,BT= before tax cost of debt (YTM on the bond ;TC is the corporate tax rate rs= cost of equity (determined using one of three methods above or average) Burnwood Tech plans to issue some preferred stock with a $6.75 dividend. A similar preferred stock is selling on the market for $81. Burnwood must pay flotation costs of 6% of the issue price. What is the cost of preferred stock taking flotation costs into account? Do flotation costs increase or decrease the cost of this capital component? 8.87%; Flotation costs increase the cost of preferred stock. 8.87%, Flotation costs decrease the cost of preferred stock. 8.33\%; Flotation costs increase the cost of preferred stock 8.33%; Flotation costs decrease the cost of preferred stockStep by Step Solution
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