5. The cost of new common stock

A.True or False: The following statement accurately describeshow firms make decisions related to issuing new common stock.

If a firm needs additional capital from equity sources once itsretained earnings breakpoint is reached, it will have to raise thecapital by issuing new common stock.

A. False: Firms raise capital from retained earnings only whenthey cannot issue new common stock due to market conditions outsideof their control.

B. True: Firms will raise all the equity they can from retainedearnings before issuing new common stock, because capital fromretained earnings is cheaper than capital raised from issuing newcommon stock.

Alpha Moose Transporters is considering investing in a one-yearproject that requires an initial investment of $475,000. To do so,it will have to issue new common stock and will incur a flotationcost of 2.00%. At the end of the year, the project is expected toproduce a cash inflow of $595,000. The rate of return that AlphaMoose expects to earn on its project (net of its flotation costs)is _________ (rounded to two decimal places).

Sunny Day Manufacturing Company has a current stock price of$22.35 per share, and is expected to pay a per-share dividend of$1.36 at the end of the year. The company’s earnings’ anddividends’ growth rate are expected to grow at the constant rate of8.70% into the foreseeable future. If Sunny Day expects to incurflotation costs of 3.750% of the value of its newly-raised equityfunds, then the flotation-adjusted (net) cost of its new commonstock (rounded to two decimal places) should be ________ .

Alpha Moose Transporters Co.’s addition to earnings for thisyear is expected to be $420,000. Its target capital structureconsists of 35% debt, 5% preferred, and 60% equity. Determine AlphaMoose Transporters’s retained earnings breakpoint:

a. $665,000

b. $875,000

c. $700,000

d. $735,000