Q1 Soundsonic Inc.\'s perpetual preferred stock sells for $39.45 per share and i
ID: 2749705 • Letter: Q
Question
Q1 Soundsonic Inc.'s perpetual preferred stock sells for $39.45 per share and it pay $7.50 in annual dividend. If the company were to sell a new preferred issue,it would incur a flotation cost of 5.00% of the price paid by investors. what is the company's cost of preferred stock for use in calculating the WACC? A.5.00% B.7.62% C.8.03% D.8.45% E.8.88% Q2.Calph Inc.'s CFO hired you as a consultant to help her estimate the cost of capital.you have been provided with the following date rRF=3.25%;RPm=6.45%;and b=1.27.Based on the CAPM approach,what is the cost of common equity from retained earnings? A.8.19% B.9.70% C.10.58% D.11.44% E.13.24% Q3 Assume that you are a consultant to Tintle Inc,and you have been provided with the following date,D1=$0.81;P0=$23.43;and g =4.00%(constant).what is the cost of common equity from ratained earning based on the DCF approach? A.3.46% B.4.00% C.4.81% D.4.97% E.7.46%
Explanation / Answer
1)
Cost of preferred stock:
= Preferred dividend÷(Stock price-Flotation cost)
= $7.5÷($39.45-5%)
= 19.04%
2)
Cost of common stock = Rf+×Rp
Rf is risk free return
Rp is risk premium
= 3.25%+1.27×6.45%
= 11.44% (D)