"dividends are not deductible"
order of priority as to income
and assets:  - bonds
              - ps
              - cs
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preferred stock features:  investor's required rate of
cumulative dividends,
participating, convertible,
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redeemable (or callable), with
sinking fund, preferred stock
as hybrid security.
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Dunkin's PS pays annual
dividend of $3.64.  Assuming
investor's required rate of
return is 7.28%, Vps = ?  50
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assuming its current market
value is $49.78, the expected
kps  = ?  7.31%
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common stock features:  CS valuation for multiple
voting rights, proxy, 2 voting
procedures (majority and
cumulative),
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pre-emptive right,2 classes of
CS, CS has limited liability
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CS valuation for single
holding period (i.e. investor
will sell his CS after one
period)
Suppose the investor is
contemplating the purchase of
JCo CS at the beginning of the
year,
JCo CS dividend at year-end
is expected to be $1.64, and
market price at year-end is
projected to be $22.  If
investor's required rate of
return is 18%,
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holding periods
A CS pays a $2 dividend last
year and is expected to pay
cash dividend each year
thereafter.  Each year, the
dividends are expected to
grow at a rate of 10% and
return is 15%. 
D1 = ?  2.20
Vcs = ?   44
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assuming current market
value of CS is $44.51,
expected kcs = ?   14.94%
ROE = niat/she
dividend payout ratio (dpr)
g = ROE x r
r + dpr = 100%
 debt, new cs, re }
  business growth
Vcs = D1 /   kcs - g     
kcs = D1/Vcs   + g
for expected kcs , use market
value of common stock

kd (cost of debt)
assume that an investor is
willing to pay $908.32 for a
bond (pv 1000, coupon rate
8%, maturing in 20 years)
what is the investor's required
rate of return, kd ? 9
(bond issuer's viewpoint) what
if the net price after flotation
costs is $850, what then will
kd be?  9.73
what is the after-tax
kd assuming tax rate of 30% ?
kps (cost of preferred stock)
if a ps pays $1.50 annual
dividend and sells for $15, the
investor's required rate of
return, kps is ?  10
(ps issuer's viewpoint) what if
the firm were to net $13.50
per share after issuance costs,
what then will kps be?  
Vcs = ?
1.39+18.64=20.03
(TIP:  the value of an asset is
the present value of all cash
flows expected from it)
kcs  (cost of cs, internal
common, retained earnings)
common stockholders recently
received $2 dividend per share
, and they expect dividends to
grow at an annual rate of
10%.  if market price of the
security is $50, the investor's
required rate of return, kcs is ?  bonds 35%
14.4
knc  (cost of new cs, external
common)
refer to kcs case above.  if
flotation costs are 15% of
market price, the cost of new
cs, knc ?    15.18
instead of intrinsic value
Vps = D/kps
kps=  D/Vps
for expected kps , use market
value of preferred stock
instead of intrinsic value 
Vb = pvi + ... + pvfv 
kb   (use excel "rate" function)
weighted cost of capital
(wacc)
ash co:
capital
structur cost
e
7%
ps 5 13
cs 60 16
if ash co needs $1.255 million
financing, how much will be
through bond issuance?
what is ash co's weighted cost
of capital ?  12.70
refer to wacc given table
above.  if there are only
100,000 shares of $100 par
value cs, how much total
financing can ash co have
without the need to issue new
cs ?