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 = 4.8%. The firm's current common stock price, P0, is $24.80. 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. % 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 adjustment = $2.40 / [$24.80 * (1 - 4.8%)] + 5%

= 15.17%

Flotation cost adjustment = 15.17% - 12%

= 3.17%

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