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Homework answers / question archive / Problem 1: Consider issuing preferred shares with an annual dividend of $12
Problem 1: Consider issuing preferred shares with an annual dividend of $12.00 per preferred share. These shares will sell for $ 100 each. The cost of issuance (flotation cost) is $ 8 per share. Calculate the cost of preferred capital. You must show the calculations to receive a score for your answer Problem 2: The Dupt corporation plans to do a common stock issue to fund its next equity investment project. The market price of the corporation's stock is $ 75 per share. A dividend of $5 per share is expected to be paid at the end of the year. The corporation has had an average annual growth of 6%. The issue cost is $ 2.50 per share. Determine the cost of equity capital using Gordon's constant growth method (Gordon Growth Model). You must show the computations to receive credit for your answer
Problem 1 :
Cost of preferred capital :
= Dividend / (Price of preferred stock - Flotation cost)
= $12.00 / ($100 - $8)
= $12.00 / $92
= 0.1304
= 13.04%
Cost of preferred capital = 13.04%
Problem 2 :
Cost of equity using Gordon's constant growth model:
= [ Expected Dividend / (Price of stock - Issue cost) ] + Growth rate
= [ $5 / ($75 - $2.50) ] + 0.06
= 0.06896 + 0.06
= 0.12896
= 0.1290
= 12.90%