Barton Industries expects next year\'s annual dividend, D1, to be $2.20 and it e

Question

Barton Industries expects next year's annual dividend, D1, to be $2.20 and it expects dividends to grow at a constant rate g = 4.1%. The firm's current common stock price, P0, is $20.70. If it needs to issue new common stock, the firm will encounter a 6% 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

Ke=g+D1/P0

=4.1%+2.2/20.70

=14.72%

Retained earnings do not carry any flotation cost, so you should use a cost of zero.

:Ke=g+D1/P0

=4.1%+2.2/20.7(1-0.06)

=15.41%

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