Suppose That Wave Runners' Common Shares Sell for $35 Per

question 11

Multiple Choice

Suppose that Wave Runners' common shares sell for $35 per share, are expected to set their next annual dividend at $2.00 per share, and that all future dividends are expected to grow by 10 percent per year, indefinitely. If Wave faces a flotation cost of 15 percent on new equity issues, what will be the flotation-adjusted cost of equity?

• A) 6.73 percent
• B) 10.07 percent
• C) 15.71 percent
• D) 16.72 percent

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Definitions:

Competitive Industry

An industry characterized by numerous sellers and buyers, where no single entity has the market power to influence the price of goods or services.

Market Demand

The total quantity of a product or service that consumers are willing and able to purchase at various prices.

Perfectly Competitive

A perfectly competitive market is one where there are many buyers and sellers, all dealing in identical products, and where no single entity can influence the market price.

Perfectly Elastic

Describes a market situation in which the quantity demanded or supplied changes by an infinite amount in response to any change in price.