Our next concern is to find the after-tax cost of common stock, after attending to finding the after-tax cost of long-term debt and after-tax cost of preferred stock.
Common stock, which is also called common shares or ordinary shares, refers to the category of ownership of the enterprise. Common shares generally have voting rights and better potential for appreciation of shares compared to preferred stock.
However, holders of common stock generally do not have fixed dividends and cannot receive dividends until dividends are paid out to preferred stock holders. Moreover, in case of liquidation, holders of common stock only have claim on company’s assets if claims of all creditors as well as holders of preferred stock are satisfied. Therefore, common stock is more risky than preferred stock.
Cost of common stock (rp)
To determine the specific after-tax costs of common stock (rp), you can use two techniques: Gordon model or the CAPM (Capital Asset Pricing Model)
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