Barton Industries expects next year\'s annual dividend, D 1 , to be $1.90 and it

Question

Barton Industries expects next year's annual dividend, D1, to be $1.90 and it expects dividends to grow at a constant rate g = 4.2%. The firm's current common stock price, P0, is $23.00. If it needs to issue new common stock, the firm will encounter a 5.9% flotation cost, F. Assume that the cost of equity calculated without the flotation adjustment is 12% and the cost of old common equity is 11.5%.

a.)What is the flotation cost adjustment that must be added to its cost of retained earnings? Round your answer to 2 decimal places. Do not round intermediate calculations.

b.) What is the cost of new common equity considering the estimate made from the three estimation methodologies? Round your answer to 2 decimal places. Do not round intermediate calculations.

Explanation / Answer

Cost of equity with floatation cost = D1/P(1-f)   +g

                                                                    = 1.90/23x(1-0.059)    + 0.042

                                                                   = 12.98%

a) cost of equity without floatation cost =12%

Floatation cost adjustment = Cost of equity with floatation cost - cost of equity without floatation cost

                                                      = 12.98% -12%

                                                      = 0.98%

b) cost of new common equity would be 12.98%

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