During the last few years, Jana industries has been too constrained by the high cost of capital to make many capital investments. Recently, though, money costs have been declining, and the company has decided to look seriously at a major expansion program that had been proposed by the marketing department. Assume that you are an assistant to the Leigh Jones the financial vice president. Your first task is to estimate Jana cost of capital. You have been provided with the following data, which may be relevant to your task: The firm's tax rate is 40 percent. The current price of Jana 12% coupon, semiannual payment, noncallable bonds with 15 years remaining to maturity is $1,153.72. Jana does not use short-term interest-bearing debt on a permanent basis. New bonds would be privately placed with no flotation cost. The current price of the firm's 10%, $100 par value, perpetual preferred stock is $116.95. Jana would incur flotation costs equal to 5% per share on a new issue. Jana common stock is currently selling at $50.00 per share. Its last dividend (D0) was $3.12, and dividends are expected to grow at a constant rate of 5.8% percent in the foreseeable future. Jana beta is 1.2; the yield on t-bonds is 5.6%; and the market risk premium is estimated to be 6% . For the bond-yield-plus-risk-premium approach, the firm uses a 3.2% point risk premium. Jana uses all three estimates of the cost of the common equity component in an equally weighted manner. New common stock would incur a flotation cost of 15%. Jana target capital structure is 30 percent long-term debt, 10 percent preferred stock, and 60 percent common equity. PLEASE ANSWER THE FOLLOWING 3 QUESTION.
1. What are the two primary ways companies raise common equity?
2. Why is there a cost associated with reinvested earnings?
3. Jana doesn’t plan to issue new shares of common stock. Using the CAPM approach, what is Jana’s estimated cost of equity?