13. The firm issued 502,000 shares of common stock which is now priced at $30 pe

Question

13. The firm issued 502,000 shares of common stock which is now priced at $30 per share in the market. The firm's last common stock dividend was paid in the amount of $3. Dividends are expected to grow at a rate of 3% indefinitely. Issuing new stock will incur a 5% flotation cost. The firm is in the 40% tax bracket. What is the cost of capital for the firm's common stock?

a. 10.30%

b. 10.53%

c. 14.00%

d. 8.40%

e. None of the answers provided is correct

Aurora, Inc., a manufacturer of required accessories for all princesses is in the 40% tax bracket and exhibits the following balance sheet: Cash Accounts Receivable Inventory Net Plant, Property and Equipment $ 2,000 3,000 500,000 1000.000 $1,505,000 Total Assets Accounts Payable Accrued Wages Bonds S 1,000 2,000 650,000 S 653,000 Total Debt Preferred Stock Common Stock Retained Earnings S 50,000 502,000 300,000 $ 852,000 Total Equity Total Debt and Equity $1,505,000

Explanation / Answer

Hence, correct option is  e. None of the answers provided is correct.

Cost of common equity (r) D1÷P0+g Here, Stock price (P0) $                   30.00 Expected dividend (D1) $                     3.09 Growth rate (g) 3.00% Cost of common equity (r) 13.30% $3.09/$30+3%

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