Jones Distributing Corp. can sell common stock for $27 per share and its investors require a 17% return. However, the administrative or flotation costs associated with selling the stock amount to $2.70 per share. What is the cost of capital for Jones Distributing if the corporation raises money by selling common stock?
What is this nonsense about investors requiring a 17% return????
Stock holders cannot require any amount of return in a publicly traded company!!
To calculate the cost of capital for Jones Distributing Corp. when raising money by selling common stock, we need to consider the cost of issuing the stock and the required return of the investors.
First, let's calculate the net proceeds per share after deducting the administrative or flotation costs:
Net Proceeds per Share = Selling Price per Share - Administrative/Flotation Costs per Share
= $27 per share - $2.70 per share
= $24.30 per share
Next, we calculate the cost of capital using the formula:
Cost of Capital = Net Proceeds per Share / Selling Price per Share
Cost of Capital = $24.30 per share / $27 per share
Cost of Capital = 0.9 (rounded to two decimal places)
Finally, we convert the cost of capital to a percentage by multiplying it by 100:
Cost of Capital = 0.9 * 100
= 90%
Therefore, the cost of capital for Jones Distributing Corp. when raising money by selling common stock is 90%.