Quiz: Chapter 9 Time Remaining: 01.27 32 Submit Quiz This Question: 1 pt 5of10 (
ID: 2618220 • Letter: Q
Question
Quiz: Chapter 9 Time Remaining: 01.27 32 Submit Quiz This Question: 1 pt 5of10 (0 complete) ? This Quiz: 10 pts possible oe Retained earnings versus new common stock the constant-growth valuation model Using the data for a firm shown in the following table, calculate the cost of retained earnings and the cost of new (Cäck on the icon located on the top-right corner of the data table below in order to copy its contents into a spreadsheet) common stock using Projected Current market Dividend dividend per Underpricing price per share growth rate share next year per share $1.00 per share $2 00 $68.00 7% 54 76 a. The cost of retained earnings isLk (Round to two decrmal places ) b. The cost of new common stock is%. (Round to two decimal places )Explanation / Answer
a). cost of retained earning (existing common stock) = next year dividend / current market price + growth rate
=$4.76 / $68 + 0.07
=0.07 + 0.07
=14%
Note:- For existing common share,there will be no flotation cost and underpricing .These cost will be applicable on the new or fresh issue of stock
b) Cost of new common stock = next year dividend / [current market price - underpricing - flotation cost] + growth rate
=$4.76 / [$68 - $1 - $2] + 0.07
=$4.76 / $65 + 0.07
=0.0732 + 0.07
=14.32%
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