Neptune Corporation has a capital structure of 40% debt and 60% common equity. This capital structure is expected not to change. The firm’s tax rate is 21%. The firm can issue the following securities to finance capital investments:
Debt: Capital can be raised through bank loans at a pretax cost of 9.2%. Also, bonds can be issued at a pretax cost of 7.0%.
9. Neptune has just announced a 50% stock dividend. Which of the following statements is correct?
Group of answer choices
The price of each share decreases and the number of shares outstanding rises with the firm’s market capitalization unchanged
The stock price does not change because the firm’s value is not affected by the stock dividends
The price of each share increases as this dividend increases the firm’s market capitalization
The stock price increases because this stock dividend improves the investors’ expectations concerning their future cash flows
Common Stock: Retained earnings will be available for investment. In addition, new common stock can be issued at the market price of $90. Flotation costs will be $2 per share. The recent common stock dividend was $5.79. Dividends are expected to grow at 7% in the future.
What is the firm’s cost of external equity?
SET YOUR CALCULATOR TO 4 DECIMAL PLACES AND ROUND TO 2 DECIMAL PLACES AT THE END. DO NOT ENTER THE % SIGN. IF YOUR ANSWER IS 7.7011%, FOR EXAMPLE, ENTER 7.70.