A company plans to raise additional capital by issuing new shares of preferred stock, which has acurrent value of $40 per share. If the company pays a $2.50 dividend, what should be the cost toissue new shares if the company will incur flotation costs of 6%?O 6.6%O 6.25%O 12.6%O 12%

Annual dividend (d) = $2.50 Current value (P0) = $40 Flotation cost (F) = 0.06 Cost of new shares…

Answered: A company plans to raise additional…

Financial Accounting Intro Concepts Meth/Uses

14th Edition

ISBN:9781285595047

Author:Weil

Publisher:Weil

Chapter15: Shareholders’ Equity: Capital Contributions And Distributions

Section: Chapter Questions

Problem 2Q

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Stock Price after Recapitalization Lee Manufacturings value of operations is equal to 900 million after a recapitalization. (The firm had no debt before the recap.) Lee raised 300 million in new debt and used this to buy back stock. Lee had no short-term investments before or after the recap. After the recap, wd = 1/3. The firm had 30 million shares before the recap. What is P (the stock price after the recap)?
Suppose IWT has decided to distribute $50 million, which it presently is holding in liquid short-term investments. IWT’s value of operations is estimated to be about $1,937.5 million; it has $387.5 million in debt and zero preferred stock. As mentioned previously, IWT has 100 million shares of stock outstanding. Assume that IWT has not yet made the distribution. What is IWT’s intrinsic value of equity? What is its intrinsic stock price per share? Now suppose that IWT has just made the $50 million distribution in the form of dividends. What is IWT’s intrinsic value of equity? What is its intrinsic stock price per share? Suppose instead that IWT has just made the $50 million distribution in the form of a stock repurchase. Now what is IWT’s intrinsic value of equity? How many shares did IWT repurchase? How many shares remained outstanding after the repurchase? What is its intrinsic stock price per share after the repurchase?
The Castle Company recently reported net profits after taxes of $15.8 million. It has 2.5 million shares of common stock outstanding and pays preferred dividends of $1 million a year. The company’s stock currently trades at $60 per share. Compute the stock’s earnings per share (EPS). What is the stock’s P/E ratio? Determine what the stock’s dividend yield would be if it paid $1.75 per share to common stockholders.

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A company plans to raise additional capital by issuing new shares of preferred stock, which has a current value of $40 per share. If the company pays a $2.50 dividend, what should be the cost to issue new shares if the company will incur flotation costs of 6%? O 6.6% O 6.25% O 12.6% O 12%