23) Use the dividend growth model to determine the required rate of return for e

Question

23) Use the dividend growth model to determine the required rate of return for equity. Your firm intends to issue new common stock. Your investment bankers have determined that the stock should be offered at a price of $20.00 per share and that you should anticipate paying a dividend of $0.75 in one year. If you anticipate a constant growth in dividends of 3.00% per year and the investment banking firm will take 8.00% per share as flotation costs, what is the required rate of return for this issue of new common stock?

A) 7.08%

B) 6.83%

C) 10.20%

D) 7.19%

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25) Orange Electronics Inc. has a profitability ratio of 0.14, an asset turnover ratio of 1.7, a debt to equity ratio of 0.60 and a total asset to equity ratio of 1.60. What is the firm's ROE?  

A) 38.08%

B) 14.28%

C) 41.76%

D) 22.85%

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Use the dividend growth model to determine the required rate of return for equity. Your firm intends to issue new common stock. Your investment bankers have determined that the stock should be offered at a price of $20.00 per share and that you should anticipate paying a dividend of $0.75 in one year. If you anticipate a constant growth in dividends of 3.00% per year and the investment banking firm will take 8.00% per share as flotation costs, what is the required rate of return for this issue of new common stock? 7.08% 6.83% 10.20% 7.19% Orange Electronics Inc. has a profitability ratio of 0.14, an asset turnover ratio of 1.7, a debt to equity ratio of 0.60 and a total asset to equity ratio of 1.60. What is the firm's ROE? 38.08% 14.28% 41.76% 22.85%

Explanation / Answer

FLOTATION COAST IS A ONE TIME COST AND SHOULD NOT BE CONSIDERED FOR CALULATION OF COST OF EQUITY . RATHER SHOULD BE TREATED AS INITIAL OUTFLOW.

aLTERNATIVELY SOME PLACES IT IS TREATED AS A PART AND USED IN CALCULATION. AS HERE..

cOST OF EQUITY= d/pRICE ADJUSTED FOR FLOATION COST +GRPWTH

.75/20(1-8%) +.03

=7.08 (a)

25) roe= profitability ratio*asset turnover ratio* total asset to equity ratio

a 38.08

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