You Are a Finance Intern at Chambers and Sons and They

question 20

Multiple Choice

You are a finance intern at Chambers and Sons and they have asked you to help estimate the company's cost of common equity.You obtained the following data: D? = $1.25; P? = $27.50; g = 5.00% (constant) ; and F = 6.00%.What is the cost of equity raised by selling new common stock?

• A) 9.06%
• B) 9.44%
• C) 9.84%
• D) 10.23%
• E) 10.64%

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Definitions:

Maturity

The date on which the principal amount of a financial instrument, such as a bond or loan, is due to be repaid.

Investment Grade

Refers to the quality of a company's credit. To be considered investment grade, a company's debt must be rated at BBB- or higher by Standard and Poor's, or Baa3 or higher by Moody's.

Standard & Poor's

A financial market intelligence company known for its stock market indices such as the S&P 500, as well as its credit ratings of borrowers.

Liquidity Preference Theory

A theory that suggests investors demand a higher interest rate or premium on securities with longer maturities to compensate for the increased risk of holding them.