Question

Jana estimates that if it issues new common stock, the floation cost will be 15%. Jana incorporates the floation cost into the division's growth approach, What is the estimated cost of newly issued common stock, taking into account the floation cost?Pertinent information:firms tax rate=40%Jana's coupon=12%, semiannual, noncallable bond with 15 years remaining to maturity is $1,153.72. no short term interest bearing debt.current price of the firms 10%, $100 par value, quarterly dividend, perpetual preferred stock is $116.95. Jana would incur flotation costs equal to 5% of the proceeds on a new issue.Jana's common stock selling at $50/share. Last dividend was $3.12 and dividends are expected to grow at a constant rate of 5.8%. Jana's beta=1.2, yield on t-bonds=5.6%, market risk premium is estimated to be 6%. The firm uses a 3.2% risk premium

Answer 1

Answer:

The cost of newly issued common stock will be 5.8% after incorporating the effect of flotation cost.

Explanation:

WACC is the cost of capital of all the sources of finance. This cost of capital should consider all the sources of finance. Jana should include long term debts and equity financing costs to identify the Weighted average cost of capital. Preferred stocks are also added in the calculations.