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UNULMINDIA: Course Home Codification Ch 11: Assignment - Determining the cost of Capital Back to Assignment Attempts: Average: 12 6. Flotation costs and the costs
UNULMINDIA: Course Home Codification Ch 11: Assignment - Determining the cost of Capital Back to Assignment Attempts: Average: 12 6. Flotation costs and the costs of new debt and equity capital Read each of the following statements, and indicate whether each statement is true or false. Statement Firms raise capital from retained earnings only when they cannot Issue new common stock due to market conditions outside of their control. One reason that flotation costs associated with the sale of new equity is significantly greater than those associated with the sale of new debt is the difference in number and characteristics of the purchasers of the new securities. The cost of retained earnings and the cost of new common stock are calculated in the same manner, except that the cost of the new shares is based on the value of the firm's share price net of its flotation cost, while the cost of a firm's retained earnings is based solely on the share's expected future cash flows, its current market price, and the expected rate of growth of the firm's carnings and the share's dividends. Consider the case of Alpha Moose Transporters: Alpha Moose Transporters has a current stock price of $20 per share, and is expected to pay a pershare dividend of $4,20 at the end of next year. The company's earnings and dividends growth rate are expected to grow at a constant rate of 4.70% into the foreseeable future. If Sunny Day expects to incur flotation costs of 4.70% of the value of its newly-raised equity funds, then the flotation-adjusted (net) cost of Rs new common stock (rounded to two decimal places) should be Grado R NOW Save & Continue Continue without saving
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