Byron Corporation
Byron Corporation's present capital structure, which is also its target capital structure, is 40 percent debt and 60 percent ordinary equity.Next year's net income is projected to be R21,000, and Byron's payout ratio is 30 percent.The company's earnings and dividends are growing at a constant rate of 5 percent; the last dividend (D0) was R2.00; and the current equilibrium share price is R21.88.Byron can raise all the debt financing it needs at 14.0 percent.If Byron issues new ordinary shares, a 20 percent flotation cost will be incurred.The firm's marginal tax rate is 40 percent.
-Refer to Byron Corporation.What is the component cost of the equity raised by selling new ordinary shares?

Question

Quizplus · Accepted Answer

The component cost of equity raised by selling new ordinary shares is calculated using the formula: Cost of new equity = (D1 / (P0 * (1 - F))) + g, where D1 is the expected dividend, P0 is the current share price, F is the flotation cost, and g is the growth rate. Here, D1 = D0 * (1 + g) = 2.00 * 1.05 = 2.10, P0 = 21.88, F = 0.20, and g = 0.05. Substituting these values gives: Cost of new equity = (2.10 / (21.88 * (1 - 0.20))) + 0.05 = 0.17 or 17.0%.

Byron Corporation Byron Corporation's Present Capital Structure, Which Is Also Its Target