Calculate the cost of equity

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1. There are many ways to calculate the cost of equity. One fairly simple way is to consider the additional dividend that would have to be paid on the shares of stock that are issued to maintain the expected return for all investors. What would be the additional "cost" if the dividend is 50¢ per share each year, and you issued 200,000 shares? What is the annual return to the investor if the stock price is $20 and there is no change in price?

2. Assume a kayak oven costs $250,000 to purchase and $50,000 to lease. Compute the yearly expenses for purchasing the oven with all cash, all loan, and all stock.  * To calculate the Cost of Capital, assume a Certificate of Deposit would earn 5% in the bank; the loan rate is 9% per annum; stock price is currently $20 with a yearly dividend of 50¢ per share.

 

CASH

LOAN

STOCK

LEASE

Capital Required

$250,000

$250,000

$250,000

$0

Cost of Capital *

 

 

 

$0

Depreciation @ 5% per yr.

 

 

 

$0

Total Yearly Expense

 

 

 

$50,000

3. Why might you not want to use just stock to fund your capital investment? What other factors might you consider when evaluating the investment options? Which option (or combination of options) from the table in question 2 makes the most sense?

Reference no: EM133036869

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