Barton Industries expects next year\'s annual dividend, D 1 , to be $2.00 and it

Question

Barton Industries expects next year's annual dividend, D1, to be $2.00 and it expects dividends to grow at a constant rate g = 4.5%. The firm's current common stock price, P0, is $20.50. If it needs to issue new common stock, the firm will encounter a 4.2% 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%.

A.) 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. ____%

B.) 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

You can use this table, I have considered that the company has used the methodology that they have arrived at cost of equity by taking average or some other measures. Also, company if change has taken place considers them will use this measure as given as if you use the values in formula of equity changes are visible as shown in the table.

Ke = D1/(P0-flotation cost)+G D1 P0 G Actaul by formula Actaul used by the company Change required cost of equity calculated without the flotation adjustment (old) 11.500%                 2.00                 20.50 4.500% 14.256% 11.500% cost of equity calculated without the flotation adjustment (new) 12.000%                 2.09                 20.50 4.500% 15.142% 12.000% Adjustment Required 0.500%                 0.09                        -                   -   0.886% 0.500% 0.386%

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