6 July, 13:57

# J. ross and sons inc. j. ross and sons inc. has a target capital structure that calls for 40 percent debt, 10 percent preferred stock, and 50 percent common equity. the firm's current after-tax cost of debt is 6 percent, and it can sell as much debt as it wishes at this rate. the firm's preferred stock currently sells for \$90 a share and pays a dividend of \$10 per share; however, the firm will net only \$80 per share from the sale of new preferred stock. ross expects to retain \$15,000 in earnings over the next year. ross' common stock currently sells for \$40 per share, but the firm will net only \$34 per share from the sale of new common stock. the firm recently paid a dividend of \$2 per share on its common stock, and investors expect the dividend to grow indefinitely at a constant rate of 10 percent per year. refer to j. ross and sons inc. what is the firm's cost of newly issued common stock?a. 15.5%b. 16.5%c. 10.0%d. 12.5%e. 18.0%

+5
1. 6 July, 16:46
0
Cost of new common equity is found by using Dividend (D0), growth rate (g) and Price of the newly issued stock (P0).

where, D0 = \$2 per share

P0 = \$34

g = 10%

Cost of new common equity = {D0 * (1+g) }/P0 + g

Cost of new common equity = [\$2 * (1+0.1) ]/34 + 0.1

= (2.2) / 34 + 0.1

= 16.47% or 16.5%

Therefore the correct answer is 16.50% (b)