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ivolga24 [154]
3 years ago
8

Garcia Ltd. is trying to estimate its cost of common equity, and it has the following information. The firm has a beta of 0.90,

the before-tax cost of the firm's debt is 7.75%, and the firm estimates that the risk-free rate is 5% while the current market return is 13%. The firm pays dividends annually and expects dividends to grow at a constant rate of 5% indefinitely. The most recent dividend per share, paid yesterday, is $2.00. Currently, the firm's stock sells for $35.00 per share, but if the firm issues new shares, it will net $33.15 per share. Finally, the firm has a marginal tax rate of 34%. The cost of new common stock is ___________.
Business
1 answer:
Lady bird [3.3K]3 years ago
6 0

Answer:

Cost of common stock = 11.33%

Explanation:

<em>The cost of common stock can be determined using the dividend valuation model.</em>

<em>According to the dividend valuation, the value of a stock is the present value of expected future dividends discounted at the required rate of return</em>.

The model can me modified to determined the cost of equity having flotation cost as follows:

Cost of equity = D(1+r )/P(1-f) + g

d- dividend, p- price of stock , f - flotation cost , - g- growth rate  

Cost of common stock =

D- 2.00, g- 5%, Price net flotation cost = $33.15

Ke = 2.00 × (1.05)/33.15)  + 0.05 × 100

= 11.33%

Cost of common stock = 11.33%

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<u>Intelligence.</u>

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On December 31, 2017, Jerome Company has an accounts receivable balance of $316,000 before any year-end adjustments.
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The Allowance for Uncollectible Accounts at December 31, 2017 is $10,430

Explanation:

In order to calculate the Allowance for Uncollectible Accounts at December 31, 2017 we would have to make the following calculation:

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Estimated Allowance 1-30 days=$152,000*1%=$1,520

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