Suppose that Company ABC will deliver a dividend of $2.5 per

share next year. Its common stock is traded at $55 per share. Market investors

expect the company's sales will rise 8% a year. Suppose that stock floatation cost

is 15% of stock sales.

1.a (5 marks) What is the cost of equity if only retained earnings is used?

1.b (5 marks) What is the cost of equity if new equity is issued?

1.c (5 marks) What is the retained earnings breakpoint for ABC this year?

1.d (10 marks) If ABC has a target capital structure of 40% in common equity and

50% in debt, and the company is expected to have a net income of $200 million

this year. The company has maintained a payout rate of 50%. If ABC wants to

invest in a new project that requires a capital investment of $400 million, what is

the average WACC for this new project? Assume that ABC can borrow at a rate of

6%.

Answer rating: 100% (QA)

1a The cost of equity DividendStock Price Growth Rate 2555 08 073 or 73 The cost of equity is the expected return on a stock It is calculated by takin... View the full answer