Phillips Enterprises Inc is expected to pay a dividend of 2.60 next year. Dividends are expected to
grow at a constant rate of 8 per year, and the stock price is currently 20.00.
New stock can be
sold at this price subject to flotation costs of 15. The company's marginal tax rate is 35. Compute
the cost of internal equity (retained earnings) and the cost of external equity (new common stock),
respectively.
A) 21.00, 23.29 B) 0, 21.00 C) 8.00, 23.29 D) 23.00, 25.48
Question 2
A local restaurant owner is considering expanding into another rural area. The expansion project
will be financed through a line of credit with City Bank.
The administrative costs of obtaining the
line of credit are 500, and the interest payments are expected to be 1,000 per month. The new
restaurant will occupy an existing building that can be rented for 2,500 per month. The
incremental cash flows for the new restaurant include
A) 2,500 per month rent.
B) 500 administrative costs, 1,000 per month interest payments, 2,500 per month rent.
C) 1,000 per month interest payments, 2,500 per month rent.
D) 500 administrative costs, 2,500 per month rent.
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