Compute
a.
To calculate: The costs of retained earnings and new common stock according to the given circumstances.
Introduction:
Retained Earnings (Ke):
They are considered the profits of the company not distributed as dividend to shareholders. They are reserved for the purpose of reinvesting into the business, that is, for the expansion of the business.
New common stock (Kn):
Also termed as ordinary shares, it is a type of security that represents corporate equity ownership. It is the best means to earn a real rate of return ahead of inflation in the long run.
Answer to Problem 17P
The costs of retained earnings and new common stock are 15.14% and 15.94%, respectively.
Explanation of Solution
Calculation of the cost of retained earnings (Ke):
Calculation of the cost of common stock (Kn):
b.
To calculate: The costs of retained earnings and new common stock according to the given circumstances.
Introduction:
Retained Earnings (Ke):
They are considered the profits of the company not distributed as dividend to shareholders. They are reserved for the purpose of reinvesting into the business, that is, for the expansion of the business.
New common stock (Kn):
Also termed as ordinary shares, it is a type of security that represents corporate equity ownership. It is the best means to earn a real rate of return ahead of inflation in the long run.
Answer to Problem 17P
The costs of retained earnings and new common stock are 7.79% and 7.86%, respectively.
Explanation of Solution
Calculation of the cost of retained earnings (Ke):
Calculation of the cost of common stock (Kn):
c.
To calculate: The costs of retained earnings and new common stock according to the given circumstances.
Introduction:
Retained Earnings (Ke):
They are considered the profits of the company not distributed as dividend to shareholders. They are reserved for the purpose of reinvesting into the business, that is, for the expansion of the business.
New common stock (Kn):
Also termed as ordinary shares, it is a type of security that represents corporate equity ownership. It is the best means to earn a real rate of return ahead of inflation in the long run.
Answer to Problem 17P
The costs of retained earnings and new common stock are 15.33% and 16.07%, respectively.
Explanation of Solution
Calculation of the cost of retained earnings (Ke):
Calculation of the cost of common stock (Kn):
Working Note:
Calculation of dividend:
d.
To calculate: The costs of retained earnings and new common stock according to the given circumstances.
Introduction:
Retained Earnings (Ke):
They are considered the profits of the company not distributed as dividend to shareholders. They are reserved for the purpose of reinvesting into the business, that is, for the expansion of the business.
New common stock (Kn):
Also termed as ordinary shares, it is a type of security that represents corporate equity ownership. It is the best means to earn a real rate of return ahead of inflation in the long run.
Answer to Problem 17P
The costs of retained earnings and new common stock are 17.7% and 18.26%, respectively.
Explanation of Solution
Calculation of the cost of retained earnings (Ke):
Calculation of the cost of common stock (Kn):
Working Note:
Calculation of dividend:
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Chapter 11 Solutions
Foundations of Financial Management
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