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    cost of stock/DCF

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    1) xyz stock currently trades at $45.50 per share. At the end of year, xyz is expected to pay annual dividend of $3.65 per share and the firm's dividend is expected to grow at a constant rate of 4% per year. What is the firm's cost of retained earnings?

    2)If xyz were to issue new common stock, the new shares could be sold at the current market price, but flotation costs would account for 10% of the proceeds. What is xyz cost of new common stock?

    3) xyz has forecasted net income of $500 million and a capital budget of $800 million for next year. xyz target capital structure consists of 65% debt and 35% equity. The firm also plans to keep its dividend payout ratio fixed at 40%. What is the relevant cost of common equity to be used in calculating xyz weighted average cost of capital (WACC) on the last dollar it raises?

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    Solution Preview

    1) Given that,
    Current price of XYZ stocks=$45.50
    Expected annual dividend=$3.65
    Expected dividend growth rate=4%
    Hence,
    Cost of retained earnings=($3.65/$45.50)+4%=12.02%

    2) Given ...

    Solution Summary

    This solution explores how to calculate cost of stock/dcf.

    $2.19

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