Problem 10.07 Problem 10-7 Cost of Common Equity with and without Flotation The

Question

Problem 10.07 Problem 10-7 Cost of Common Equity with and without Flotation The Evanec Company's next expected dividend, D1, is $3.66; its growth rate is 5%; and its common stock now sells for $38. New stock (external equity) can be sold to net $34.20 per sha a. What is Evanec's cost of retained earnings, r? Round your answer to two decimal places b. What is Evanec's percentage flotation cost, F? Round your answer to two decimal places. c. What is Evanec's cost of new common stock, re? Round your answer to two decimal places

Explanation / Answer

a.Cost of retained earnings=(Dividend for next period/Current price)+Growth rate

=(3.66/38)+0.05

=14.63%

b.Floatation cost=(38-34.2)/38

=10%

c.Cost of common stock=(Dividend for next period/Current price-Floatation cost)+Growth rate

=(3.66/34.2)+0.05

=15.70%(Approx)

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