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6 June, 03:19

Uber plans to sell shares of common stock to raise capital funds. They estimate that each share of common stock will sell for $181, but their investment bank will charge a 4% fee. The face value is $181 per share. Uber also plans to pay a dividend each year of 10% while maintaining an annual growth rate of 7% to keep their shareholders happy. What is Uber's cost of capital of this common stock?

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  1. 6 June, 05:50
    0
    18.11%

    Explanation:

    Data provided in the question:

    Selling price = $181

    Fees charged = 4% = 0.04

    Face value = $181 per share

    Dividend paid each year = 10% = 0.10

    Annual growth rate = 7% = 0.07

    Now,

    Uber's cost of capital of this common stock

    = [ D1 : (Face value - D1) ] + Growth rate

    = [ ($181 * 0.1) : ($181 - 181 * 0.1) ] + 0.07

    = [ 18.1 : 162.9 ] + 0.07

    = 0.1811

    or

    = 0.1811 * 100% = 18.11%
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