CHAPTER 10 The Cost of Capital
Problem solving

Lidija Dedi

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Problem 1:
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Your company’ stock sells for $50 per share, its last dividend was $2, its growth rate is a constant 5%, and the company will incur a flotation cost of 15% if it sells new common stock. What is the firm’s cost of new equity?
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Problem 2:
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Alpha’s stock currently has a price of $50 per share and is expected to pay a year-end dividend of 2,50 per share. The dividend is expected to grow at a constant rate of 4% per year The company has insufficient retained earnings to fund capital projects and must therefore, issue new common stock. The new stock has an estimated flotation cost of $3 per share What is the company’s cost of equity capital?9-3

Problem 3:
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Current market price of the firm’s stock is $28 Its last dividend was $2,20 Its expected dividend growth rate is 6% Calculate cost of retained earnings?

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Problem 4:
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The company capital structure is 70% equity and 30% debt The yield to maturity on the company’s bonds is 9%

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The company’s year-end dividend is forecasted to be $0,80 a share
The company expects that its dividend will grow at a constant rate of 9% a year The company’s stock price is $25 The company’s tax rate is 40%

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The company anticipates that it will need to raise new common stock this year Its investment bankers anticipate that the total flotation cost will equal 10% of the amount issued Assume the company accounts for flotation costs by adjusting the cost of capital Calculate the company’s WACC
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Problem 5:
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Company’s capital structure
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40% debt 60% common equity

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The company has 20-year bonds outstanding with a 9% annual coupon that are trading at par Tax rate is 40%
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The risk-free rate is 5,5% The market risk premium is 5% The stock beta is 1,4 Calculate the company’s