What impact do flotation costs have on the cost of common equity? Question 8 options: None. The cost of retained earnings and new stock must be the same since they both represent the same claim by shareholders. It makes new stock less expensive compared to retained earnings. It makes new stock more expensive compared to retained earnings.

What impact do flotation costs have on the cost of common equity? Question 8 options: None. The cost of retained earnings and new stock must be the same since they both represent the same claim by shareholders. It makes new stock less expensive compared to retained earnings. It makes new stock more expensive compared to retained earnings.

Financial Management: Theory & Practice

16th Edition

ISBN:9781337909730

Author:Brigham

Publisher:Brigham

Chapter9: The Cost Of Capital

Section: Chapter Questions

Problem 4MC: d. (1) What are the two primary ways companies raise common equity? (2) Why is there a cost...

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d. (1) What are the two primary ways companies raise common equity? (2) Why is there a cost associated with reinvested earnings? (3) Jana doesnt plan to issue new shares of common stock. Using the CAPM approach, what is Janas estimated cost of equity?
Why is the cost of retained earnings cheaper than the cost of issuing new common stock? Group of answer choices Issuing new common stock may send a negative signal to the capital markets, which may depress the stock price. When a company issues new common stock they also have to pay flotation costs to the underwriter. Either Neither
Which of the following statement(s) is(are) TRUE? (i) The valuation price of a stock primarily depends on expected future dividends to its shareholders and its required rate of return. (ii) An investor who intends to sell a stock after holding it for a short period will forgo all future dividends, thus will be willing to pay for a lower price for the stock compared to another investor who prefers to hold the share for a longer period. (iii) The valuation share price is positively related to the share's required rate of return.
a. What is the relationship between the expected return of a stock and its fair expected return? When is a stock underpriced, overpriced, or fairly priced? b. Explain what happens to the firm’s cost of equity, cost of debt, and cost of capital when the firm increases the amount of debt in its capital structure. Assume all Modigliani and Miller assumptions hold and that there are no taxes. c. How can we use the internal rate of return to evaluate whether we should pursue a specific project? Should we pursue a project when the cost of capital is higher than the internal rate of return?
To the extent that shares sold during an IPO are discounted from their appropriate price, the proceeds that the issuing firm receives from the IPO are lower than it deserves. Question 21 options: True False
Is preferred stock more or less risky to investors than debt? Group of answer choices More risky because companies are not required to pay preferred dividend. Less risky because companies are not required to pay preferred dividends. No answer text provided. No answer text provided.
What is the relationship between the expected return of a stock and its fair expected return? When is a stock underpriced, overpriced, or fairly priced? Explain what happens to the firm’s cost of equity, cost of debt, and cost of capital when the firm increases the amount of debt in its capital structure. Assume all Modigliani and Miller assumptions hold and that there are no taxes. How can we use the internal rate of return to evaluate whether we should pursue a specific project? Should we pursue a project when the cost of capital is higher than the internal rate of return?
True or False: The following statement accurately describes how firms make decisions related to issuing new common stock. Taking flotation costs into account will reduce the cost of new common stock. False: Flotation costs are additional costs associated with raising new common stock. True: Taking flotation costs into account will reduce the cost of new common stock, because you will multiply the cost of new common stock by 1 minus the flotation cost—similar to how the after-tax cost of debt is calculated. Alpha Moose Transporters is considering investing in a one-year project that requires an initial investment of $475,000. To do so, it will have to issue new common stock and will incur a flotation cost of 2.00%. At the end of the year, the project is expected to produce a cash inflow of $595,000. The rate of return that Alpha Moose expects to earn on its project (net of its flotation costs) is (18.25, 20.53, 22.81, 14.83) (rounded to two decimal…
Cost of new common stock A firm will never have to take flotation costs into account when calculating the cost of raising capital from . True or False: The following statement accurately describes how firms make decisions related to issuing new common stock. The cost of issuing new common stock is calculated the same way as the cost of raising equity capital from retained earnings. Pick A or B A- False: Flotation costs need to be taken into account when calculating the cost of issuing new common stock, but they do not need to be taken into account when raising capital from retained earnings. B- True: The cost of retained earnings and the cost of new common stock are calculated in the same manner, except that the cost of retained earnings is based on the firm’s existing common equity, while the cost of new common stock is based on the value of the firm’s share price net of its flotation cost. Cold Goose Metal Works Inc. is considering a…
3. The cost of preferred stock Preferred stock is a hybrid security, because it has some characteristics typical of debt and others typical of equity. The following table lists various characteristics of preferred stock. Determine which of these characteristics is consistent with debt and which is consistent with equity. Characteristics Debt Equity Dividends are fixed. No tax adjustments are made when calculating the cost of preferred stock. Consider the case of Turnbull Enterprises: At the present time, Turnbull Enterprises does not have any preferred stock outstanding but is looking to include preferred stock in its capital structure in the future. Turnbull has found some institutional investors that are willing to purchase its preferred stock issue provided that it pays a perpetual dividend of $13 per share. If the investors pay $100.15 per share for their investment, then Turnbull’s cost of preferred stock (rounded to four…
which one is correct please confirm? QUESTION 21 Finance researcher Myron Gordon argues that ____. a. the clientele effect has no influence on share value b. the existence of transaction costs has no impact on the dividend decision c. dividends reduce uncertainty, and thus the payment of dividends will increase the firm's value d. risk-averse shareholders may prefer some dividends over the promise of future capital gains if the interest rate is expected to decline
The higher the firm's flotation cost for new common equity, the more likely the firm is to use preferred stock, which has no flotation cost, and reinvested earnings, whose cost is the average return on the assets that are acquired. Group of answer choices True False

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	None. The cost of retained earnings and new stock must be the same since they both represent the same claim by shareholders.
	It makes new stock less expensive compared to retained earnings.
	It makes new stock more expensive compared to retained earnings.