Suppose that Company ABC will deliver a dividend of $2.5 pe
Suppose that Company ABC will deliver a dividend of $2.5 per share… Suppose that Company ABC will deliver a dividend of $2.5 per share next year. Its common stock is traded at $55 per share. Market investors expect the company’s sales will rise 8% a year. Suppose that stock floatation cost is 15% of stock sales. 1.a What is the cost of equity if only retained earnings is used?1.b What is the cost of equity if new equity is issued? 1.c What is the retained earnings breakpoint for ABC this year?1.d If ABC has a target capital structure of 40% in common equity and 50% in debt, and the company is expected to have a net income of $200 million this year. The company has maintained a payout rate of 50%. If ABC wants to invest in a new project that requires a capital investment of $400 million, what is the average WACC for this new project? Assume that ABC can borrow at a rate of 6%.Accounting Business Financial Accounting FINANCE 354
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