Barton Industries expects next year\'s annual dividend, D1, to be $2.40 and it e

Question

Barton Industries expects next year's annual dividend, D1, to be $2.40 and it expects dividends to grow at a constant rate g = 4.3%. The firm's current common stock price, P0, is $24.90. If it needs to issue new common stock, the firm will encounter a 4% 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%. 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. % 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

As per DCF methodology the cost of existing equity is given ad D1/P0 + g = 2.4/24.9 + 4.3% = 13.94%,

But its given that cost of old common equity is 11.5%, so we will take codt of existing equity = 11.5%.

Cost of new equity with floation cost is D1/P0×(1-F) + g = 2.4/24.9×0.96 + g = 14.34%

Cost of equity without floation is 12%.

14.34% - 12% = 2.34% is floation cost adjustment to be added to retained earnings,

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