Financial Reporting, Financial Statement Analysis and Valuation
8th Edition
ISBN: 9781285190907
Author: James M. Wahlen, Stephen P. Baginski, Mark Bradshaw
Publisher: Cengage Learning
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If a firm plans to issue new stock, flotation costs (investment bankers' fees) should not be ignored. There are two approaches to use to account for flotation costs. The first approach is to add the sum of flotation costs for the debt, preferred, and common stock and add them to the initial investment cost. Because the investment cost is increased, the project's expected
The difference between the flotation-adjusted
Quantitative Problem: Barton Industries expects next year's annual dividend, D1, to be $1.70 and it expects dividends to grow at a constant rate g = 4.7%. The firm's current common stock price, P0, is $23.60. If it needs to issue new common stock, the firm will encounter a 5.2% flotation cost, F. Assume that the cost of equity calculated without the flotation adjustment is 12% and the cost of old common equity is 11.5%. What is the flotation cost adjustment that must be added to its cost of
%
What is the cost of new common equity considering the estimate made from the three estimation methodologies? Do not round intermediate calculations. Round your answer to two decimal places.
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- Companies that face large investments they cannot finance internally through the retention of earnings must go to the financial market to raise the needed funds. When they do this, they will incur what are commonly referred to as floatation costs. Discuss how these floatation costs should be incorporated into the firm’s analysis of net present valuearrow_forwardIn financial analysis, it is important to select an appropriate discount rate. A project’s discount rate must be high to compensate investors for the project’s risk. The return that shareholders require from the company as a compensation for their investment risk is referred to as the cost of equity. Consider this case: Weghorst Co. is a 100% equity-financed company (no debt or preferred stock); hence, its WACC equals its cost of common equity. Weghorst Co.’s retained earnings will be sufficient to fund its capital budget in the foreseeable future. The company has a beta of 1.35, the risk-free rate is 4.5%, and the market return is 5.9%. What is Weghorst Co.’s cost of equity? 1.95% 19.08% 8.02% 6.39% Weghorst Co. is financed exclusively using equity funding and has a cost of equity of 10.65%. It is considering the following projects for investment next year: Project Required Investment Expected Rate of Return W $23,575 9.65% X…arrow_forwardIf an investment project has a negative net present value (NPV), which one of the following statements about the internal rate of return (IRRT) of this project must be true? Select the correct response: The IRR is negative. The IRR is less than the company's weighted average cost of capital. The IRR is equal to zero. The IRR is greater than the company's weighted average cost of capital.arrow_forward
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- Which of the following statements is CORRECT? a. WACC calculations should be based on the before-tax costs of all the individual capital components. b. Flotation costs associated with issuing new common stock normally reduce the WACC. c. An increase in the risk-free rate will normally lower the marginal costs of both debt and equity financing. d. A change in a company's target capital structure cannot affect its WACC. e. If a company's tax rate increases, then, all else equal, its weighted average cost of capital will decline.arrow_forwardWhich of the following formulas is INCORRECT? g = retention rate × return on new investment. When return on equity is equal to the cost of equity, shareholders will prefer the firms' management to increase the payout ratio. When return on new investment is more than the cost of equity, the share price is expected to increase. g = (1 – payout rate) x return on new investment.arrow_forwardSolve this problemarrow_forward
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