Hi, :) Can you please help me with this. Thank you! Quantitative Problem: Barton

Question

Hi, :) Can you please help me with this. Thank you!

Quantitative Problem: Barton Industries expects next year's annual dividend, D1, to be $2.30 and it expects dividends to grow at a constant rate g = 4.6%. The firm's current common stock price, P0, is $20.50. If it needs to issue new common stock, the firm will encounter a 4.9% 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.
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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 calc

Explanation / Answer

If the firm has 4.9% floatation cost then cost of new outside equity is calculated as follows

KE = D1 / P0 (1-f) +g

= $2.30/ $20.50 (1- 0.049) + 0.046

= 16.40%

Flotation cost adjustment is the amount that must be added to retained earnings to account for floatation cost to find

cost of equity

Flotation adjustment = Adjusted DCF cost - Pure DCF cost = 16.40% - 15.82% = 0.58%

Cost of equity without floatation cost

KE = D1 / P0 +g

= $2.30/ $20.50 + 0.046

= 15.82%

Cost of new common equity considering the estimate made from the three estimation methodologies is 16.4%.

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