The company's external equity comes from those funds raised from public issuance of shares or rights. The cost of external equity is the minimum rate of return which the shareholders supply new funds <span>by </span>purchasing<span> new shares to prevent the decline of the market value of the shares. To compute the cost of external equity, we should use this formula:</span>
Ke<span> = (DIV 1 / Po) + g</span>
Ke<span> = cost of external equity</span>
DIV 1 = dividend to be paid next year
Po = market price of share
g = growth rate
In the problem, the estimated dividend to be paid next year is $1.50. The market price is $18.50 and the growth rate is 4%.
<span>Substituting the given to the formulas, we need to divide $1.50 by $18.50 giving us the result of 8.11% plus the growth rate; this would yield to the result of 12.11% cost of external equity.</span>
Answer:
a. 14.75%
b. Under priced
Explanation:
The computation for the required rate of return is shown below:
a. Expected rate of return = Risk-free rate of return + Beta × (Market rate of return - Risk-free rate of return)
= 6% + 1.25 × (13% - 6%)
= 6% + 1.25 × 7%
= 6% + 8.75%
= 14.75%
b. As the required rate of return comes 14.75% and the required return is 16% so it is under priced as expected return is more than the required return
Answer:
Total period cost under variable costing $60,000
Explanation:
The computation of the total period cost under variable costing is shown below:
Variable selling and administrative expenses (880 units × $15) $13,200
Add: Fixed selling and administrative expenses $21,120
Add: Fixed manufacturing overhead $25,680
Total period cost under variable costing $60,000
The franchaiser may supply financing
