International Financial Management
14th Edition
ISBN: 9780357130698
Author: Madura
Publisher: Cengage
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What is the cost of common stock for Foggy Futures Weather Forecasters ? The firm is in the 40% tax bracket. The optimal capital structure is listed below:
| Source of Capital | Weight |
| Long-Term Debt | 25% |
| 20% | |
| Common Stock | 55% |
| Debt: | The firm can issue $1,000 par value, 8% coupon interest bonds with a 20-year maturity date. The bond has an average discount of $30 and flotation costs of $30 per bond. The selling price is $1,000. |
| Preferred Stock: | The firm can sell preferred stock with a dividend that is 8% of the current price. The stock costs $95. The cost of issuing and selling the stock is expected to be $5 per share. |
| Common Stock: | The firm’s common stock is currently selling for $90 per share. The firm expects to pay cash dividends of $7 per share next year. The dividends have been growing at 6%. The stock must be discounted by $7, and flotation costs are expected to amount to $5 per share. |
| The firm expects to have enough retained earnings in the coming year to be used in place of any new stock being issued. |
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