8 page capital budgeting technique paper
The cost of new equity for the firm is $44.50 per share ($50 – 10% flotation cost). The advantage of this type of financing is that there are no fixed payments required, allowing the company to retain more cash flow and reinvest it in other areas. Additionally, since shareholders benefit from capital gains as well as dividends, companies can use dividends to attract potential investors who are looking for steady returns on their investments.
However, using this type of financing does have some disadvantages as well. For example, since the dividend payout is fixed each year it could result in a lower return for investors than what they would receive through other types of investments over longer time periods. Furthermore, if the company fails to generate enough profits to pay out dividends then shareholders may not see any return at all which could cause them to lose faith in the business and sell their stock.
Overall, while raising money through dividends can be an effective form of financing; businesses must carefully consider its implications before committing as it may not always be the best option given prevailing market conditions or specific goals related to long-term growth and sustainability.