Determine the rate of return that Wooten expects to earn on the project after fl

Question

Determine the rate of return that Wooten expects to earn on the project after flotation costs are taken into account. Wooten Co. has a current stock price of $33.35 and is expected to pay a dividend of $2.45 at the end of next year. The company's growth rate is expected to remain constant at 9.4%. If flotation costs represent 6.0% of funds raised, what is the flotation-adjusted cost of new common stock? Wooten Co's addition to comings for this year is expected to be $ ¢5,000. its target capita, structure , 50% debt, 5% preferred, and 45% equity. Determine Wooten's retained earnings breakpoint.

Explanation / Answer

Below is thw answer to the middle problem

Cost of New Equity (En)

Stock Price = 33.35

Dividend (D1) = 2.45

Growth Rate (g) = 9.4% = 0.094

Floatation Cost ( F) = 6% = 0.06

Now,

En  = ( DIVIDEND / Stock Price * ( 1 - F) ) + g

   = (2.45 / 33.35 * ( 1 - 0.06) ) ) + 0.094

   =( 2.45 / 33.35 * 0.94 ) + 0.094

   = 0.07815 + 0.094

   = 0.1721

   = 17.21%

Hence the 4th option 17.2% is correct

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