Foust has 25-year non-callable bonds outstanding with a face value of $1,000, an 12% annual coupon, and a market price of $1,320. Foust can issue perpetual preferred stock at a price of $47.50 a share. The stock would pay a constant annual dividend of $3.80 a share. Its capital structure, considered to be optimal, is as follows: Debt $111,000,000 Preferred Stock $4,000,000 Common equity $155,000,000 Total liabilities and equity $270,000,000 If the firm’s bonds earn a return calculated in part (i), based on the bond-yield-plus-risk-premium approach, what will be cost of common equity?

Foust has 25-year non-callable bonds outstanding with a face value of $1,000, an 12% annual coupon, and a market price of $1,320. Foust can issue perpetual preferred stock at a price of $47.50 a share. The stock would pay a constant annual dividend of $3.80 a share. Its capital structure, considered to be optimal, is as follows: Debt $111,000,000 Preferred Stock $4,000,000 Common equity $155,000,000 Total liabilities and equity $270,000,000 If the firm’s bonds earn a return calculated in part (i), based on the bond-yield-plus-risk-premium approach, what will be cost of common equity?

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter8: Basic Stock Valuation

Section: Chapter Questions

Problem 14P

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