2. Cost of common equity - DCF Fletcher Publishing\'s stock currently trades at

Question

2. Cost of common equity - DCF Fletcher Publishing's stock currently trades at $45.50 per share. At the end of the year, Fletcher Is expected to pay an annual dividend of $4.40 per share (D1 = $4.40), and the firm's dividend is expected to grow at a constant rate of 4% per year. What is the firm's cost of retained earnings (rs)? 12.57% 12.02% 13.12% 13.89% 13.67% If Fletcher were to issue new common stock, the new shares could be sold at the current market price, but flotation costs would account for 10% of the proceeds. What is Fletcher's cost of new common stock (re)? 14.13% 12.91% 14.74% 13.83% 13.52% Fletcher has forecasted net Income of $500 million and a capital budget of $800 million for next year. Fletcher's target capital structure consists of 65% debt and 35% equity. The firm also plans to keep Its dividend payout ratio fixed at 35%. What is the relevant cost of common equity to be used in calculating Fletcher's weighted average cost of capital (WACC) on the last dollar It raises? 12.24% 14.74% 13.34% 15.36% 13.67%

Explanation / Answer

1)cost of retained earnings = (D1/Current price ) +growth

                                        = (4.40/45.5)+.04

                                       = .0967+.04

                                          = 13.67%

correct option is 13.67% - "E"

2)cost of new stock =[D1/Current price(1-floatation cost)] +Growth

                            = [ 4.40 / 45.5(1- .1)] +.04

                              = [4.4/40.95]+.04

                               =.1074+.04

                               =.1474 or 14.74%

correct option is"C"= 14.74%

3)correct option is "E" - 13.67%

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