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Gelneren [198K]
3 years ago
5

If a firm plans to issue new stock, flotation costs (investment bankers' fees) should not be ignored. There are two approaches t

o use to account for flotation costs. The first approach is to add the sum of flotation costs for the debt, preferred, and common stock and add them to the initial investment cost. Because the investment cost is increased, the project's expected return is reduced so it may not meet the firm's hurdle rate for acceptance of the project. The second approach involves adjusting the cost of common equity as follows:
.The difference between the flotation-adjusted cost of equity and the cost of equity calculated without the flotation adjustment represents the flotation cost adjustment.

Quantitative Problem: Barton Industries expects next year's annual dividend, D1, to be $2.30 and it expects dividends to grow at a constant rate g = 4%. The firm's current common stock price, P0, is $21.30. If it needs to issue new common stock, the firm will encounter a 4% flotation cost, F. Assume that the cost of equity calculated without the flotation adjustment is 12% and the cost of old common equity is 11.5%. What is the flotation cost adjustment that must be added to its cost of retained earnings? Round your answer to 2 decimal places. Do not round intermediate calculations.
%

What is the cost of new common equity considering the estimate made from the three estimation methodologies? Round your answer to 2 decimal places. Do not round intermediate calculations.
Business
1 answer:
AysviL [449]3 years ago
4 0

Answer:

Floating cost adjustment is 3.25%

Explanation:

Flotation-adjusted cost of equity = (Expected dividend at the end of Year 1 / Net proceeds per share) + Growth rate.

Expected dividend at the end of Year 1 (D1) = $ 2.30 (given in question)

Net proceeds per share = (21.30 - 4 % of 21.30) = $ 20.448

Flotation-adjusted cost of equity = (2.30 / 20.448) + 0.04

= 0.1125 + 0.04

= 0.1525 i.e., 15.25 %.

Flotation cost adjustment = Flotation-adjusted cost of equity - Cost of equity without flotation adjustment.

= 15.25 % - 12 % (given in question)

= 3.25 %.

Conclusion:- Flotation cost adjustment = 3.25 %

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Answer:

                               General Journal

Accounts Titles and Explanation          Debit     Credit

Office supplies                                        $295

Advertising expense                               $120

Transportation expense                          $75

<em>Cash short and over                                $11 </em>

Cash ($800 - $299)                                                 $501

(Being replenishment of fund recorded)

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3 years ago
You are taking a $6,226 loan. You will pay it back in four equal amounts, paid every year, with the first payment occurs at the
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Answer:

annual payment = $2,362.88

Explanation:

we must first calculate the future value of the loan at the end of year 4 = $6,226 x (1 + 11%)⁴ = $9,451.51

using the present value of an annuity formula we can determine the annual payment:

annual payment = present value of an annuity / PV annuity factor

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4 0
3 years ago
Why would economic growth be important to maintaining national strength?
never [62]
D. Economic growth creates the wealth that pays for defense and future investments.
5 0
3 years ago
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Penn Station is saving money to build a new loading platform. Two years ago, they set aside $24,000 for this purpose. Today, tha
vekshin1

Answer:

0,087792106  = rate

Explanation:

We need to calculate the interest of the investment

principal x (1 + rate)^time = value

replacing with the know values

24,000 x  (1+rate)^2   =  28,399

28,399/24,000      = (1 + rate)^2

sqrt (28,399/24,000)  -1 = rate

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4 0
3 years ago
Silmon Corporation makes a product with the following standard costs:
kolbaska11 [484]

Answer:

Material quantity variance =$74, 280  unfavorable        

Explanation:

<em>The material quantity variance occurs when the actual quantity of material used to achieve a given level of output is more or less than the standard quantity expected.</em>

For Silmon Corporation, it can be computed as follows:

Quantity variance is                                                          

                                                                                        Gram

5,300 units should have used ( 5300× 5.1 )                 27,030

but did used                                                                    <u>39,410</u>

Variance in quantity                                                      12,380 Unfavorable

Price per unit                                                              <u> × $6</u>

Material quantity variance                                         <u> $ 74,280</u>. Unfavorable

   

Material quantity variance =$74, 280  unfavorable                                  

5 0
3 years ago
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