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What Is the Cost of Common Stock for Foggy Futures

question 1

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What is the cost of common stock for Foggy Futures Weather Forecasters? The firm is in the 40% tax bracket. The optimal capital structure is listed below: ? $\begin{array} { | l | l | } \hline \text { S ource of Capital } & \text { W eight } \\\hline \text { Long-Term Debt } & 25 \% \\\hline \text { Preferred Stock } & 20 \% \\\hline \text { Common Stock } & 55 \% \\\hline\end{array}$ ? $\begin{array}{|l|l|}\hline \text { Debt: }&\begin{array}{ll}\text {The firm can issue $ \$ 1,000 \mathrm{p} $ ar value, $ 8 \% $ coupon interest bonds with a 20 -year }\\\text {maturity date. The bond has an average discount of $ \$ 30 $ and flotation costs of }\\\text { $ \$ 30 $ per bond. The selling price is $ \$ 1,000 $ .}\end{array}\\\hline \text {Preferred Stock: }&\begin{array}{ll}\text {The firm can sell preferred stock with a dividend that is $ 8 \% $ of the current price. }\\\text { The stock costs $ \$ 95 $ . The cost of issuing and selling the stock is expected }\\\text {to be $ \$ 5 $ per share. }\end{array}\\\hline \text {Common Stock: }&\begin{array}{ll}\text {The firm's common stock is currently selling for $ \$ 90 $ per share. }\\\text {The firm's common stock is currently selling for $ \$ 90 $ per share. The firm expects to pay cash dividends }\\\text { The dividends have been growing at $ 6 \% $ . The stock must be discounted by $ \$ 7 $ , }\\\text {and flotation costs are expected to amount to $ \$ 5 $ per share. }\end{array}\\\hline \text { Retained Earnings:}&\begin{array}{ll}\text { The firm expects to have enough retained earnings in the coming year to be used}\\\text { in place of any new stock being issued. }\end{array}\\\hline \end{array}$

Definitions:

Par Value

The nominal or face value of a stock or bond, as stated by the issuing company, that has no direct correlation to the market value.

Corporate Existence

The state of being recognized as a legal entity that is separate from its owners, enabling the corporation to own assets, incur liabilities, and enter into contracts.

Business Combination

A transaction or other event in which an acquirer obtains control of one or more businesses.

Common Stock

Equity ownership in a corporation, giving shareholders voting rights and a share in the company's profits through dividends.