J.Ross and Sons Inc

question 22

Multiple Choice

J.Ross and Sons Inc.
J.Ross and Sons Inc.has a target capital structure that calls for 40 percent debt, 10 percent preference shares, and 50 percent ordinary equity.The firm's current after-tax cost of debt is 6 percent, and it can sell as much debt as it wishes at this rate.The firm's preference shares currently sell for R90 a share and pays a dividend of R10 per share; however, the firm will net only R80 per share from the sale of new preference shares.Ross expects to retain R15,000 in earnings over the next year.Ross' ordinary shares currently sells for R40 per share, but the firm will net only R34 per share from the sale of new ordinary shares.The firm recently paid a dividend of R2 per share on its ordinary shares, and investors expect the dividend to grow indefinitely at a constant rate of 10 percent per year.
-Refer to J.Ross and Sons Inc.What is the firm's cost of newly issued ordinary shares?

• A) 10.0%
• B) 12.5%
• C) 15.5%
• D) 16.5%
• E) 18.0%

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Definitions:

Negotiable Instrument

A written document guaranteeing the payment of a specific amount of money either on demand or at a set time, with the payee’s name mentioned on it.

Fraud in the Factum

A deception made during the act of signing a document, where the signer is misled about the nature of the document and what signing it entails.

Liable

Being legally responsible or obligated; for example, due to negligence or breach of contract.

Holder in Due Course

A party who has acquired a negotiable instrument in good faith, for value, and without notice of any defects, and thus has certain legal protections.