Cost of raising capital-new common stock-retained earnings

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Reference no: EM13907537

1. Fuzzy Button Clothing Company is considering a one-year project that requires an initial investment of $600,000; however, in raising this capital, Fuzzy Button will incur an additional flotation cost of 5%. At the end of the year, the project is expected to produce a cash inflow of $900,000. The rate of return that Fuzzy Button expects to earn on the project after its flotation costs are taken into account is _________.

2. Fuzzy Button has a current stock price of $22.35 and is expected to pay a dividend of $2.45 at the end of next year. The company’s growth rate is expected to remain constant at 4%. If the issue's flotation costs are expected to equal 5% of the funds raised, the flotation-cost-adjusted cost of the firm's new common stock is ________.

3. Fuzzy Button’s addition to earnings for this year is expected to be $857,000. Its target capital structure consists of 50% debt, 5% preferred stock, and 45% common stock. Fuzzy Button Clothing Company’s retained earnings breakpoint is _____.

4. A firm will never have to take flotation costs into account when calculating the cost of raising capital from:

a) New Common Stock

b) Retained Earnings

Reference no: EM13907537

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