Answer:
Cost of equity = 14.74%
Explanation:
The capital asset pricing model is a risk-based model for estimating the return on a stock..
Here, the return on equity is dependent on the level of reaction of the the equity to changes in the return on a market portfolio. These changes are captured as systematic risk.
Systematic risks are those which affect all economic actors in the market, they include factors like changes in interest rate, inflation, etc. The magnitude by which a stock is affected by systematic risk is measured by beta.
Under CAPM,
E(r)= Rf + β(Rm-Rf)
E(r)- cost of equity , Rf-risk-free rate , β= Beta, Rm= Return on market.
Using this model, we can work out the value of beta as follows:
β-1.2 Rf- 4.3%, Rm = 13%
E(r) = 4.3% + 1.2 × (13 - 4.3)%=14.74 %
Expected return = 14.74 %
Cost of equity = 14.74%
TB MC Qu. 8-198 The Puyer Corporation makes ... The Puyer Corporation makes and sells only one product called a Deb. The company is in the process of preparing its Selling and Administrative Expense Budget for next year. The following budget data are available: Monthly Fixed Cost Variable Cost Per Deb Sold Sales commissions $ 1.02 Shipping $ 1.52 Advertising $ 51,200 $ 0.32 Executive salaries $ 61,200 Depreciation on office equipment $ 21,200 Other $ 41,200 All of these expenses (except depreciation) are paid in cash in the month they are incurred. If the company has budgeted to sell 16,200 Debs in February, then the total budgeted fixed selling and administrative expenses for February is:
Answer:
The Puyer Corporation
The total budgeted fixed selling and administrative expenses for February is:
$174,800
Explanation:
a) Data and Calculations:
Advertising $ 51,200
Executive salaries $ 61,200
Depreciation on office equipment $ 21,200
Other $ 41,200
Total fixed selling & admin. exp. $174,800
b) The Puyer Corporation's fixed selling and administrative expenses are always fixed in total but not per unit of Deb within the short-term because they do not depend on Deb's volume of production or sale. They are unlike the variable aspect of expenses that are fixed per unit of Deb but vary in total. Those expenses which do not vary with the level or volume of sales or production activity of Deb are regarded as fixed because the level or volume of sales or production activity of Deb does not change their totals. But, in the long-term, Puyer's fixed expenses will vary in total as well as per unit of Deb produced or sold.
Kalanick’s attributes include focus and perseverance. These attributes are most closely related to which of the following?
a. high extroversion
b. low emotional stability
c. high agreeableness
d. high openess to experience
e. proactive personality
Answer: proactive personality
Explanation:
Proactive personality has to do with the individuals who identify opportunities, and also show perseverance and initiative and wait till there's a meaningful change regarding a particular situation.
Since Kalanick’s attributes include focus and perseverance. The attributes are most closely related to proactive personality.
Tracy Company owns 4,000 of the 10,000 outstanding shares of Penn Corporation common stock. During 2018, Penn earns $450,000 and pays cash dividends of $150,000. If the beginning balance in the investment account was $900,000, the balance at December 31, 2018 should be:_______.
a. $900,000.
b. $1,020,000.
c. $1,080,000.
d. $1,200,000.
Answer:
$1,020,000
Explanation:
Tracy company has 4,000 out of the 10,000 outstanding shares the common stock of Penn corporation
Penn earns $450,000 during 2018
They make a cash dividend payment of $150,000
The beginning balance in the investment is 900,000
Therefore, the balance at December 31, 2018 can be calculated as follows
= $900,000 + ($450,000×0.4)-($150,000×0.4)
= $900,000+$180,000-$60,000
= $1,080,000-$60,000
= $1,020,000
Hence the balance at December 31st, 2018 is $1,020,000
You own 150 shares of Western Feed Mills stock valued at $41.20 per share. What is the dividend yield if your annual dividend income is $372
Answer:
6.01%
Explanation:
Calculation for the dividend yield
Using this formula
Dividend yield=(Annual dividend income/Numbers of shares)/Amount per shares
Let plug in the formula
Dividend yield =($372/150 shares)/$41.20 per share
Dividend yield =$2.48/$41.20
Dividend yield =0.0601*100
Dividend yield =6.01%
Therefore Dividend yield will be 6.01%
Assume that interest rates on 15-year noncallable Treasury and corporate bonds with different ratings are as follows: T-bond = 7.72% A = 9.64% AAA = 8.72% BBB = 10.18% The differences in rates among these issues were most probably caused primarily by:
Answer:
Investors are risk averse, which means that they are willing to invest in low risk projects or investments. In order for an investor to invest in a riskier project, he/she will expect to receive higher returns to compensate for the extra risk. US Treasury bonds are probably the safest investments in the world, that is why they yield the lowest interest rate. AAA bonds are less risky than BBB bonds, which in turn are less risky than CCC bonds. That is why AAA bonds yield a lower return than BBB bonds, and BBB bonds yield a lower return than CCC bonds.
All of the following are factors that may complicate capital investment analysis except a.qualitative factors. b.changes in price levels. c.the federal income tax. d.the age of the current fixed assets.
Answer:
Correct Answer:
a.qualitative factors.
Explanation:
Capital investment analysis is the process by which management plans, evaluates, and controls long-term investment decisions involving fixed assets. For example, in a situation where a decision was taken to install new equipment, replace old equipment, and purchase or construct a new building.
Answer:
d.the age of the current fixed assets.
Explanation:
The age of current fixed assets is straight forward since it was set at start of operation based on company`s usage thus within the entity`s control.
However the other factors makes capital investment analysis complex as they are not within the entity`s control.
A company has net income of $925,000; its weighted-average common shares outstanding are 185,000. Its dividend per share is $0.70, its market price per share is $93, and its book value per share is $83.50. Its price-earnings ratio equals:
Answer:
$18.60
Explanation:
Calculation for the price-earnings ratio
Using this formula
Price-Earnings Ratio = Market Price per Share/ Earnings per share
The Earnings per share will be Net Income/(Weighted-Average Common Shares Outstanding)
Let plug in the formula
Price-Earnings Ratio = $93 / ($925,000 / 185,000)
Price-Earnings Ratio=$93/5
Price-Earnings Ratio=$18.60
Therefore the price-earnings ratio will be $18.60
A company determined that the budgeted cost of producing a product is $30 per unit. On June 1, there were 89000 units on hand, the sales department budgeted sales of 390000 units in June, and the company desires to have 200000 units on hand on June 30. The budgeted cost of goods sold for June would be
Answer:
COGS= $8,370,000
Explanation:
Giving the following information:
Unitary cost= $30
Beginning inventory= 89,000
Sales= 390,000
Ending inventory= 200,000
First, we need to calculate the number of units sold:
Units sold= 89,000 + 390,000 - 200,000
Units sold= 279,000
Now, the cost of goods sold:
COGS= 279,000*30= $8,370,000
Which of the following is a plausible explanation for the difference between the net change in fund balances of governmental funds (fund-level statement of revenues, expenditures, and changes in fund balances) and the change in net position of governmental activities (government-wide statement of activities)?
a. Some expenses reported in the statement of activities do not require the use of current financial resources and are not reported as expenditures in the fund-level statements.
b. Amounts reported as expenditures in the statement of activities are reported as capital assets in the fund-level statements.
c. Debt proceeds provide current financial resources in the statement of activities, but are reported as long-term liabilities in the fund-level statements
d. Depreciation of general fixed assets is not reported as an expense in the statement of activities, but it is reported as an expense in the fund-level
Answer:
a. Some expenses reported in the statement of activities do not require the use of current financial resources and are not reported as expenditures in the fund-level statements.
Explanation:
Governments maintain a statement of activities that are carried out, and fund-level statements are also maintained to track expenses of government.
When there is a disparity between the two, a plausible explanation will be that some expenses reported in the statement of activities do not require the use of current financial resources and are not reported as expenditures in the fund-level statements.
For example some long term project that is carried out by the government may be treated by creating a budget. These expenses will not be recognized in the current expenses that make up fund-level expenses.
Michelle gives out a business card with an e-mail address on it. According to the comments that accompany the UETA, it may be reasonable to infer that Michelle has consented to
Answer:
Explanation:
transact business electronically.
One year ago, you purchased a stock at a price of $55.20 per share. Today, you sold your stock at a loss of 18.63 percent. Your capital loss was $12.62 per share. What was the total dividends per share paid on this stock over the year
Answer:
Dividend = $2.34
Explanation:
Purchase Price = $55.20
Loss on stock = 18.63% of $55.20 = $10.28
Capital Loss = $12.62
Dividend = Capital Loss - Total Loss
Dividend = $12.62 - $10.28
Dividend = $2.34
According to the mean-variance criterion, portfolio A is better than portfolio B for a risk-averse investor whenever _____.
Answer: d. E(rA) ≥ E(rB) and σA ≤ σB
Explanation:
The options are:
a. E(rA) ≤ E(rB) and σA ≤ σB
b. E(rA) ≥ E(rB) and σA ≥ σB
c. E(rA) ≤ E(rB) and σA ≥ σB
d. E(rA) ≥ E(rB) and σA ≤ σB
Mean-variance criterion is when the means and the variances of the return of different portfolios are used as a basis to select a portfolio.
An investor will choose the portfolio that has a lower risk which is denoted by the standard deviation. Therefore, option D is correct.
Consider a project with a first cost (investment) of $250,000, an annual O&M cost of $50,000, annual revenue of $160,000, and a salvage value of $40,000 after a 10-year life. Find the annual worth of the project assuming an interest of 12% per year.
Answer:
$68,030
Explanation:
According to the given situation, the computation of annual worth is shown below:-
Annual worth = -250,000 (A/P, 12%, 10) - $50,000 + $160,000 + $40,000 (A/F, 12%, 10)
= -$250,000 × 0.1770 - $50,000 + $160,000 + $40,000 × 0.0570
= -$44,250 - $50,000 + $160,000 + $2,280
= $68,030
So, the right answer is $68,030
If a firm pays labor $5 and receives a MPL of 10, while paying capital $100 and receiving a MPC of 100, to lower production costs it should hire more labor and less capital.
a. True
b. False
Answer:
True
Explanation:
Here, we want to evaluate the validity of the given statement whether true or false.
The correct answer is true.
For a firm that pays $5 labor and receives a MPL of 10, while paying capital of $100, and receiving a MPC of 100, to lower production costs, it should higher more labor and less capital.
A share of stock is now selling for $110. It will pay a dividend of $8 per share at the end of the year. Its beta is 1. What do investors expect the stock to sell for at the end of the year? Assume the risk-free rate is 4% and the expected rate of return on the market is 15%. (Round your answer to 2 decimal places.)
Expected selling price $
Answer:
P1 = 118.5474 rounded off to $118.55
Explanation:
To calculate the price of the stock at the end of the year or P1, we first need to determine the required rate of return on the stock and the growth rate in dividends.
The required rate of return can be found using the CAPM equation. The formula for required rate of return under CAPM is,
r = rRF + Beta * (rM - rRF)
Where,
rRF is the risk free raterM is the return on marketr = 0.04 + 1 * (0.15 - 0.04)
r = 0.15 or 15%
Now we assume that the stock is a constant growth stock which means that the growth in dividends is expected to be constant throughout. The price of such a stock is found using the constant growth model of DDM. The formula for price today under the constant growth model is,
P0 = D1 / (r - g)
Where,
P0 is price todayD1 is expected dividend for the next periodg is the growth rate in dividendsPlugging in the available variables, g is,
110 = 8 / (0.15 - g)
110* (0.15 - g) = 8
16.5 - 110g = 8
g = (8 - 16.5) / -110
g = 0.077272 or 7.7272% rounded off to 7.73%
So to calculate the price at the end of the year or P1, we will use D2.
P1 = 8 * (1+0.0773) / (0.15 - 0.0773)
P1 = 118.5474 rounded off to $118.55
If a bank has required reserves of $27,000,000, excess reserves of $41,000,000, and deposits of $90,000,000 with a required reserve ratio of 30 percent, how much can the bank lend out?
Answer:
$41,000,000
Explanation:
Excess reserves can be described as the amount of money that is kept by a bank. This amount of money can be given out to individuals or different organisations in the form of a loan, this is done to generate more profits as a certain amount of interest is being added to the amount of cash that will be given out.
In the scenario described above, the bank has an excess reserve of $41,000,000. Therefore, the bank will be willing to lend out $41,000,000 as loan.
"The interest rate charged from the banks to broker-dealers on loans where securities are collateral is the:"
Answer: broker loan rate
Explanation:
The broker loan rate is also refered to the call loan rate and it is the interest rate that is charged from the banks to broker-dealers on loans where securities are collateral.
It should be noted that the iterest rates that are given on broker loan rates are just a little above the short term interest rates.
Investing $1,500,000 in TQM's Channel Support Systems initiative will at a minimum increase demand for your products 1.7% in this and in all future rounds. (Refer to the TQM Initiative worksheet in the CompXM Decisions menu.) Looking at the Round 0 Inquirer for Andrews, last year's sales were $163,290,917. Assuming similar sales next year, the 1.7% increase in demand will provide $2,775,946 of additional revenue. With the overall contribution margin of 34.1%, after direct costs this revenue will add $946,598 to the bottom line. For simplicity, assume that the demand increase and margins will remain at last year's levels. How long will it take to achieve payback on the initial $1,500,000 TQM investment, rounded to the nearest month
Answer:
Payback = 19 month
Explanation:
Firm has invested in TQM's Channel Support systems of $1,500,000, It will increase demand of product by 1.7%.
Last years sales revenue was $163,290,917, a 1.7% increase will mean the sales will be:
= $163,290,917 * (1+0.017)
= $163,290,917 * (1.017)
= $166,066,862.59
Thus increase in sales revenue is:
= $166,066,862.589 - $163,290,917
= $2,775,945.589
Now consider contribution margin. From Total Sales, direct variable costs are deducted to get total contribution. The Overall contribution margin is It is 34.1%.
So extra contribution due to 1.7% increase in sales is = $2,775,945.589 * 34.1%
= $946,597.45
Thus increase in contribution margin will also increase profit to the same extent as there is no addition in fixed cost due to this project. So firm will be able to recover $946,597.45 of initial investment of $1,500,000 in one year.
Pay back is the time required to recover this full initial investment. It ascertained by dividing $1,500,000 amount by the net addition in profit per year.
Payback = $1,500,000 / $946,597.45
Payback = 1.585 per year * 12 month
Payback = 19.02 month
Payback = 19 month approximately
Deming, the proponent of total quality management, argued that management has the responsibility to train employees in new skills.
A. True
B. False
Answer:
Its TRUE
Explanation:
Management should train employees in new skill, where Deming argued that management has the responsibility to train employees in new skills to keep pace with changes in the workplace. In addition, he believed that achieving better quality requires the commitment of everyone in the company.
Espinoza Company is a wholesale distributor that uses activity-based costing for all of its overhead costs. The company has provided the following data concerning its annual overhead costs and its activity based costing system:
Overhead costs:
Wages and salaries 220,000
Other expenses 150,000
Total $510,000
Distribution of resource consumption:
Filling Orders Activity Cost Pools Customer Support Other Total
Wages and salaries 35% 55% 10% 100%
Other expenses 35% 50% 15% 100%
The "Other" activity cost pool consists of the costs of idle capacity and organization-sustaining costs. The activity measures for the activity cost pools for the year are as follows:
Activity Cost Pool Activity
Filling orders 3,500 orders
Customer support 15 customers.
What would be the overall activity rate for the filling orders activity cost pool?
Answer:
Espinoza Company
Activity rate for the filling orders activity cost pool:
Overhead for filling orders divided by number of orders
= $130,500/3,500
= $37.29 per order
Explanation:
a) Data and Calculations:
Overhead costs:
Wages and salaries 220,000
Other expenses 150,000
Total $510,000
Distribution of resource consumption:
Filling Orders Activity Cost Pools
Filling Orders Customer Support Other Total
Wages and salaries 35% 55% 10% 100%
Other expenses 35% 50% 15% 100%
Filling orders 3,500 orders
Customer support 15 customers
Overhead Allocation:
Filling Orders Customer Other Total
Support
Wages and salaries $77,000 $121,000 $22,000 $220,000
Other expenses 53,500 75,000 22,500 150,000
Total $130,500 $196,000 $44,500 $370,000
Activity rate for filling orders = $130,500/3,500 = $37.29 per order
ABC or Activity Based Costing technique uses activity pools to accumulate and distribute overhead costs so that costs can be allocated based on the level of activity undertaken for each activity pool.
Espinoza Company: The Activity rate for the filling orders activity cost pool:
The Overhead for filling orders divided by the number of orders is
= $130,500/3,500
= $37.29 per order
Calculation of Costa) Data and also Calculations:
Overhead costs:
The Wages and salaries 220,000
Then Other expenses 150,000
The total is $510,000
Then Distribution of resource consumption:
After that Filling Orders Activity Cost Pools
Filling Orders Customer Support Other Total
Wages and salaries 35% 55% 10% 100%
Other expenses 35% 50% 15% 100%
Then Filling orders 3,500 orders
Then the Customer support is 15 customers
Overhead Allocation:
Filling Orders Customer Other Total
Support
Wages and salaries $77,000 $121,000 $22,000 $220,000
Other expenses 53,500 75,000 22,500 150,000
The Total $130,500 $196,000 $44,500 $370,000
Activity rate for replenishing orders = $130,500/3,500 = $37.29 per order
ABC or When The Activity Based Costing technique uses activity pools to accumulate and distribute overhead costs so that costs can be allocated based on the level of activity undertaken for each activity pool.
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The difference between total sales revenue and total cost of goods sold is the: A. Trade margin B. Gross marketing contribution C. Net marketing contribution D. All of the above
Answer:
A. Trade margin
Explanation:
The profit obtained from trading operations is known as gross profit or trade margin.This is calculated as sales less costs of goods sold.
The difference between total sales revenue and total cost of goods sold is the gross marketing contribution.
The following information is considered:
When the cost of goods sold is deducted from the sales revenue so the gross marketing contribution should come. Neither it is trade margin, nor net marketing contribution.In other words, the difference is called as gross margin.Therefore we can conclude that the correct option is B.
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The carrying value of Blossom’s net identifiable assets, including the goodwill, at year-end is $855,000. Prepare Cullumber’s journal entry, if necessary, to record impairment of goodwill.
Answer:
Goodwill Impairment (Debit)
Goodwill (Credit)
Explanation:
In case goodwill is impaired, then the entry to record this impairment will be Goodwill Impairment Debit and Goodwill Credit.
By crediting the Goodwill, the account will be reduced. This shows that the business is currently worth less than is accounted for. The Goodwill account is reduced to identify this difference.
The Impairment loss is an expense and must be reflected in the income statement. Therefore, while we reduce Goodwill amount from balance sheet. We record the expense on the income statement, which would mean that the current year profit amount will be reduced.
Salud Company reports the following information. Use the indirect method to prepare only the operating activities section of its statement of cash flows for the year ended December 31, 2017. (Amounts to be deducted should be indicated with a minus sign.)
Selected 2017 Income Statement Data Selected Year-End 2017 Balance Sheet Data
Net income $470,000 Accounts receivable increase $40,400
Depreciation expense 87,000 Prepaid expenses decrease 16,500
Gain on sale of machinery 23,000 Accounts payable increase 10,000
Wages payable decrease 2,900
Answer:
Cash generated by operating activities is $517,200.
Explanation:
Cash flows from operating activities
Net Income $470,000
Adjustments to reconcile net income to operating cash flow
Add: Depreciation Expense $87,000
Less: Gain on Sale of Machinery $-23,000 $64,000
Change in Operating Assets and Liabilities
Accounts receivable increase $-40,400
Prepaid expenses decrease $16,500
Accounts payable increase $10,000
Wages payable decrease $-2,900 $-16,800
Cash generated by operating activities $517,200
The Absolute Zero Co. just issued a dividend of $2.70 per share on its common stock. The company is expected to maintain a constant 5.6 percent growth rate in its dividends indefinitely. If the stock sells for $54 a share, what is the company's cost of equity?
Answer:
10.88%
Explanation:
According to the given situation, the computation of the company's cost of equity is shown below:-
Stock price = (Current dividend × (1 + Growth rate)) ÷ (Cost of equity - Growth rate)
$54 = ($2.70 × (1 + 0.056)) ÷ (Cost of equity - 0.056)
Cost of equity = $2.8512 ÷ $54 + 0.056
= 10.88%
Therefore for computing the cost of equity we simply applied the above formula.
Murray Company reports net income of $770,000 for the year. It has no preferred stock, and its weighted-average common shares outstanding is 350,000 shares. Compute its basic earnings per share.
Answer:
EPS = 2.2
Explanation:
Earning per share is the amount due to each of the ordinary shareholders after settlement of interest due on loans , preferred dividends and tax.
Earnings per share (EPS) = Earnings attributable to ordinary shareholders ÷ Units of shares
Where ;
Earnings attributable to ordinary shareholders = Net income - Preferred dividends
EPS = $770,000 - 0 ÷ 350,000 shares
EPS = $2.2
Under Armour uses its website to sell its products, but Nathan Shriver, art director of Interactive, believes that what the website does, and what advertising does not do, is make the brand
Answer:
This question is incomplete, the options are missing. The options are the following:
a) Friendlier to the customer
b) Recognizable in retail stores
c) Seem special compare to off-label gear
d) Part of the consumer's daily life
e) Seem of higher quality than Nike
And the correct answer is the option D: Part of the consumer's daily life.
Explanation:
To begin with, when Nathan Shriver says that he believes that the website and advertising of the company does is to make the brand more part of the consumer's daily life refers that in the end it is that action what truly makes the company to increase its sales due to the fact that thanks to the marketing campaigns now the brand is more important in the life of the consumers and more due to the fact that those advertising make them understand that the use of Under Armour's products is essential to every day training and movement that the clients might face.
Discount factor is 0.985. Stock XYZ is selling for $40 a share. An American option on this stock with a strike price of $38 is trading at $0.25 per share. If it is known that this option is priced above its intrinsic value, what type of option is it?
Answer:
Put option
Explanation:
We have current price 40dollars - strike price 38dollars = $2. The question says the stock is trading at $0.25 per share. Since 0.25 is higher than 0 it is a put option. And the intrinsic value is $2.
The put option gives one the right to sell a particular number of shares at a price that has been set which is referred to as the strike price before a certain date.
Tameika Johnson’s supervisor is in charge of the arrangements for the annual company party. He has given Johnson the responsibility for finding a caterer for the event, arranging the entertainment, and selecting the door prizes. Johnson’s supervisor used _____ to make her accountable for most of the success or failure of the picnic.
Answer: delegation of authority
Explanation:
From the question, we are informed that Tameika Johnson’s supervisor is in charge of the arrangements for the annual company party and that he has given Johnson the responsibility for finding a caterer for the event, arranging the entertainment, and selecting the door prizes.
In this scenario, the outcome of the picnic has already been delegated to Johnson because the job role has been shared to him.
Weller Company's budgeted unit sales for the upcoming fiscal year are provided below: 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Budgeted unit sales 34,000 36,000 27,000 32,000 The company’s variable selling and administrative expense per unit is $3.30. Fixed selling and administrative expenses include advertising expenses of $11,000 per quarter, executive salaries of $53,000 per quarter, and depreciation of $33,000 per quarter. In addition, the company will make insurance payments of $4,000 in the first quarter and $4,000 in the third quarter. Finally, property taxes of $7,200 will be paid in the second quarter. Required: Prepare the company’s selling and administrative expense budget for the upcoming fiscal year. (Round "Per Unit" answers to 2 decimal places.)
Answer and Explanation:
The preparation of company’s selling and administrative expense budget for the upcoming fiscal year is shown below:-
Weller Company
Selling and Administrative Expense Budget
Particulars 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Year
Budgeted Unit
Sales a 34,000 36,000 27,000 32,000 129,000
Variable Selling and Administrative Expense
Per Unit $3.3 $3.3 $3.3 $3.3 $3.3
Variable Selling and Administrative
Expense (a × b) $112,200 $118,800 $89,100 $105,600 $425,700
Fixed Selling and Administrative Expense
Advertising $11,000 $11,000 $11,000 $11,000 $44,000
Executive
Salaries $53,000 $53,000 $53,000 $53,000 $212,000
Insurance $4,000 0 $4,000 0 $8,000
Property Taxes 0 $7,200 0 0 $7,200
Depreciation $33,000 $33,000 $33,000 $33,000 $132,000
Total Fixed Selling and Administrative
Expense $101,000 $104,200 $101,000 $97,000 $403,200
Total Selling and Administrative
Expense $213,200 $223,000 $190,100 $202,600 $828,900
Less:
Depreciation $33,000 $33,000 $33,000 $33,000 $132,000
Cash Paid for Selling and
Administrative
Expenses $180,200 $190,000 $157,100 $169,600 $696,900
Eakins Inc.'s common stock currently sells for $15.00 per share, the company expects to earn $2.75 per share during the current year, its expected payout ratio is 70%, and its expected constant growth rate is 6.00%. New stock can be sold to the public at the current price, but a flotation cost of 8% would be incurred. By how much would the cost of new stock exceed the cost of retained earnings
Answer:
1.12%
Explanation:
By how much would the cost of new stock exceed the cost of retained earnings = Cost of new equity - Cost of retained earnings
Cost of retained earnings = ((2.75 * 70%) / 15) + 6.00%
Cost of retained earnings = ((2.75 * 0.7) / 15) + 0.06
Cost of retained earnings = 0.1283 + 0.06
Cost of retained earnings =0.1883
Cost of retained earnings = 18.83%
Cost of new equity= ((2.75 * 70%) / (15 * (1 - 8%) ) + 6.00%
Cost of new equity= 19.95%
Hence, Cost of new equity - Cost of retained earnings
= 19.95% - 18.83%
= 1.12%
