The firm is forecasting its retained earnings equal to $300,000 in the coming year. Once retained earnings have been exhausted, Coleman plans to issue new shares of common stocks to raise capital. Up to $300,000 of new common stock can be sold at a flotation cost of 15%. Above $300,000, the flotation cost would rise to 25%. 7) What is the WACC after retained earnings have been exhausted and Coleman issues up to $300,000 of new common stock with a 15% flotation cost? (Hint: Calculate the new cost of equity, using the DCF method, then find new WACC) answer WACC1= 14% ;WACC=15% 8) What is the WACC if more than $300,000 of new common equity is sold? (Hint: Calculate the new cost of equity, using the DCF method, then find new WACC) 9) Explain in words why new common stock that is raised externally has a higher percentage cost than equity that is raised internally as retained earnings. Under which conditions would it not be appropriate to use internal funding rather than external funding for projects? SHOW WORK

The firm is forecasting its retained earnings equal to $300,000 in the coming year. Once retained earnings have been exhausted, Coleman plans to issue new shares of common stocks to raise capital. Up to $300,000 of new common stock can be sold at a flotation cost of 15%. Above $300,000, the flotation cost would rise to 25%. 7) What is the WACC after retained earnings have been exhausted and Coleman issues up to $300,000 of new common stock with a 15% flotation cost? (Hint: Calculate the new cost of equity, using the DCF method, then find new WACC) answer WACC1= 14% ;WACC=15% 8) What is the WACC if more than $300,000 of new common equity is sold? (Hint: Calculate the new cost of equity, using the DCF method, then find new WACC) 9) Explain in words why new common stock that is raised externally has a higher percentage cost than equity that is raised internally as retained earnings. Under which conditions would it not be appropriate to use internal funding rather than external funding for projects? SHOW WORK

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter15: Dividend Policy

Section: Chapter Questions

Problem 15P

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