Calculate the cost of equity from retained earnings (rs )AND the cost of newly issued common stock (re ). Use the Dividend Discount Model(DDM) method to find the cost of common equity.
Calculate the
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Here is the condensed 2015 balance sheet for Skye Computer Company (in thousands of dollars): |
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| CONDENSED BALANCE SHEET FOR SKYE COMPUTER COMPANY | |||
| FY2015 | |||
| Current assets | $2,000 | ||
| Net fixed assets | 3,000 | ||
| Total assets | $5,000 | ||
| Total debt | $2,100 | ||
| 250 | |||
| Common stock | 1,300 | ||
| Retained earnings | 1,350 | ||
| Total common equity | $2,650 | ||
| Total liabilities & equity | $5,000 | ||
The firm's marginal tax rate is 35%. The firm's currently outstanding 10% annual coupon rate long-term debt sells at $1,051.11. The debt matures in 7 years. Coupon interest is paid semiannually.
Skye's preferred stock pays a dividend of $3.30 per share, and its preferred stock sells for $30 per share.
Skye's earnings per share last year were $3.20. The common stock sells for $55.00, last year’s dividend (D0) was $2.10, and a flotation cost (i.e, f ) of 10% would be required to sell new common stock. Security analysts are projecting that the common dividend will grow at an annual rate of 9%.
The market risk premium is 5%, the risk-free rate is 6%, and Skye's beta is 1.516.
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