NG Inc. is thinking about issuing new common stock. Given the following information, what would be NGs cost of issuing new common stock? Beta of common stock 1.10 Risk-free rate 3.5% Expected return on the stock market 8.0% Marginal tax rate 40% A) 8.45%. B) 9.60%. C) 7.95%. D) 5.10%.
A? i pray…
I would guess A too no reason except that is return+flotation cost
Hmn. I want to say B since the cost of new equity will always be greater than retained earnings and the cost of retained earnings is 8.45% But then again I’m probably overthinking the question
^ you might be right…
Pretty sure it’s A. The question tries to trick you by including the tax rate which would affect cost of debt.
ucsbfiji Wrote: ------------------------------------------------------- > Hmn. > > I want to say B since the cost of new equity will > always be greater than retained earnings and the > cost of retained earnings is 8.45% > > But then again I’m probably overthinking the > question you clever devil. i never thought of that
wouldn’t u also have to consider flotation cost here??? B
There is no information about flotation cost so A
I’m with mcpass on this.
new issues always have floatation costs…I go with B
ok schweser says the answer is “A” by just plugging in the regular formula. wtf, they say “new common stock” and doesn’t want us to consider the floatation cost ? how to handle these kind of mess ?
you can issue new stock by giving a dividend stock for example I guess if they don’t mention flotation costs then dissconsider
dissconsider. misunderestimate. Hehe this is beautiful.
sorry 
Where do they mention floatation cost in the Schweser readings.
thepinkman Wrote: ------------------------------------------------------- > Where do they mention floatation cost in the > Schweser readings. I remember it from level 1 readings. There is a very important lesson here and it was repeated at the 3 day Schewser event - Work only within the information given to you. So if you don’t have a floatation cost, dont use it. I made that mistake here, so yea always work only with what you have and nothing of what you don’t.
whats the ANSWER V. Raghavan!!??
well ahmadmaghfur you could try reading his post above to get the answer to your question. Additionally I think the worrying about how to handle this situation needs to stop here. It’s a SCHWESER question not a CFAI question. CFAI questions are clearly and explicitly worded so that if you understand the concept you will get the right answer if you don’t, you won’t. You all seem to understand the concept so stop the panicking and realize the distinction between a schweser practice question and what you will face on the day of the exam.