Chicago Paints Corporation has a target capital structure of 40 percent debt and 60 percent common equity. The company expects to have $600 of after-tax income during the coming year, and it plans to retain 40 percent of its earnings. The current stock price is P= $30, the last dividend paid was D=$2.00, and the dividend is expected to grow at a constant rater of 7%. New stock can be sold at a flotation cost of F=25%. What will Chicago Paints' marginal cost of equity be if it raises a total of $500 of new capital?

Question

Chicago Paints Corporation has a target capital structure of 40 percent debt and 60 percent common equity.  The company expects to have $600 of after-tax income during the coming year, and it plans to retain 40 percent of its earnings. The current stock price is P= $30, the last dividend paid was D=$2.00, and the dividend is expected to grow at a constant rater of 7%. New stock can be sold at a flotation cost of F=25%. What will Chicago Paints' marginal cost of equity be if it raises a total of $500 of new capital?

anonymous · Answer

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