Module 5, Cost of Capital The current market price of stock is SR 200,...
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Accounting
Module 5, Cost of Capital
The current market price of stock is SR 200, and the stock pays an expected dividend of SR8 with a growth rate of 5%. Determine the cost of common equity.
Calcualtion of Common Equity =Dividend per share/Current market value + Growth rate of dividend
=8/200+5%
=4%+5%
=9%
A firm borrows money at 15% interest after taxes and pays 10% for equity. The company raises capital in equal proportions, i.e., 70% debt and 30% equity. Determine the Weightage Average Cost of Capital (WACC) of the Firm.
Computation of the weighted average cost of capital:
WACC = weight of equity * cost of equity + weight of debt * cost of debt
= (0.3*10) + (0.70*15)
= 13.5%
Determine the cost for a preferred stock that pays annual dividend SR 6, has issue price SR 40, and incurs flotation costs of SR 3 per share.
Cost of preferred stock = D/(P-F)
where D = Dividend,
P= price of preferred stock
F = Flotation costs
= 6/ (40-3)
= 6/37
= 0.162162 or 16.22%
THIS IS THE QUSIUINOS
What Is Optimal Capital Structure? What factors determine optimal capital structure?
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