Barton Industries expects next year\'s annual dividend, D1, to be $1.80 and it e

Question

Barton Industries expects next year's annual dividend, D1, to be $1.80 and it expects dividends to grow at a constant rate g = 4.5%. The firm's current common stock price, P0, is $22.90. If it needs to issue new common stock, the firm will encounter a 4.8% 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.

Explanation / Answer

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

                                                                    = 1.80/22.9 x (1-0.048)    + 0.045

                                                                   = 11.98%

a)

Cost of equity without floatation cost =12%

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

                                                      = 11.98% -12%

                                                      = (0.02%)

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