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Homework answers / question archive / Compute Ke and Kn under the following circumstances: a
Compute Ke and Kn under the following circumstances:
a. D1 = $4.50, P0 = $68, g = 7%, F = $6.00.
b. D1 = $0.25, P0 = $32, g = 6%, F = $2.00.
c. E1 (earnings at the end of period one) = $6, payout ratio equals 35 percent, P0 = $36, g = 5.0%, F = $3.50.
d. D0 (dividend at the beginning of the first period) = $5, growth rate for dividends and earnings (g) = 6%, P0 = $58, F = $5.
Cost of equity (Ke) = (D1 / P0) +g
Cost of new common stock (Kn) = (D1 / P0 - F) + g
a. Ke = $4.50 / $68 + 7%
= 6.62% + 7%
= 13.62%
Kn = ($4.50 / $68 - $6) + 7%
= $4.50 / $62 + 7%
= 7.26% + 7%
= 14.26%
b. Ke = $0.25/$32 + 6%
= 0.78% + 6%
= 6.78%
Kn = ($0.25 / $32 - $2) + 6%
= 0.83% + 7%
= 7.83%
c. E1 = $6
D1 = $6 * 35% = $2.10
P0 = $36
g = 5.0%
F = $3.50
Ke = $2.10 / $36 + 5.0%
= 5.83% + 5.0%
= 10.83%
Kn = $2.10 / $36 - $3.50 + 5.0%
= $3.5 / $42.5 + 5.0%
= 6.46% + 5.0%
= 11.46%
d. D0 =$ 5
g = 6%
D1 = D0 (1+g)
= $5 *(1+ 6%)
= $5.30
P0 = $58
F = $5
Ke = $5.30 / $58 + 6%
= 9.14% + 6%
= 15.14%
Kn = $5.30 / $58 - $5 + 6%
= $5.30 / $53 + 6%
= 10% + 6%
= 16%
