WACC - cost of issuing new shares

CFA Level I
#1

Genoa Corp. is estimating its weighted average cost of capital (WACC). They have several pieces of data to consider. The firm pays 40 percent of its earnings out in dividends. The return on equity (ROE) is 15 percent. Last year’s earnings were $5.00 per share and the dividend was just paid to shareholders. The current price of shares is $42.00. Genoa’s 8% coupon bonds have a yield to maturity of 7.5 percent. The firm’s tax rate is 30 percent. The cost of issuing new shares of common stock is closest to: A 14.58% B 14.19% C. 13.76% D. 14.10% How the heck do you figure out the cost of issuing new common stock? Hint, it’s not the cost of common from WACC.

#2

B g= .6 *15%= 9% dividends last yr= $2 divident next year= $2.18 k= 2.18/42 + 9% k=14.19% not sure what your hint means…but this is how I would do it…

#3

LongOn what you computed is the cost of common equity. What the question asks for is: what is the cost of ISSUING NEW SHARES OF COMMON STOCK? This is question 2406 from schweser. Part 1 asks for the cost of common equity. Part 2 asks for the cost of issuing new shares of common stock, and I’m totally confused.

#4

when it comes to common stock, use formula P=D1/(K-ROE*RR). In this question,we want to know K. We have P=42, RR=0.6, and ROE=15%, D1=5*40%*(ROE*RR), plug in the number, we can solve K

#5

um…the calculation i did above is the same as the formula u provided…its just reordered so that k= d1/p +g

#6

the answer is: [$2.00 (1.09) / $42.00 x (1 - .07)] + g = 14.58% I don’t know what the (1 - .07) is…where did they get the .07?

#7

I just plugged 2406 into q bank, and it draws a blank. Maybe it’s just a dud question.

#8

it’s from sample test 1, and I forgot that you can’t pull up the questions if they are part of the sample tests.

#9

yancey Wrote: ------------------------------------------------------- > the answer is: > > [$2.00 (1.09) / $42.00 x (1 - .07)] + g > > = 14.58% > > I don’t know what the (1 - .07) is…where did > they get the .07? That 0.07 number is supposed to be the flotation costs of new equity (as a percentage of equity value which is a little weird). This looks like a question that stayed around after the edited the story. Anyway, the cost of new equity is K = D1/(S - F) + g where F is the flotation costs per share.