Haverty Corp\'s bonds are selling to yield new investors a return of 9%, while i

Question

Haverty Corp's bonds are selling to yield new investors a return of 9%, while it's preferred stock is yielding 11%. Flotation costs are 10% of the proceeds of new issues sold to the public, and the firm's tax rate is 40%. The company just paid a dividend of $2.00 and is expected to grow at 6% indefinitely. Its stock is selling for $21.20.
a. What is Haverty's cost of debt?
b. What is Haverty's cost of preferred stock?
c . d. What is Haverty's cost of retained earnings using the expected growth approach?
What is Haverty's cost of new equity?

Explanation / Answer

a.Haverty's cost of debt=9%*(1-40%)=5.40% b. Haverty's cost of preferred stock= 11%*(1-10%)= 9.90% c. $21.20 =$2.00*1.06/(re-6%) re= 16% Haverty's cost of retained earnings using the expected growth approach= 16%

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