Barton Industries expects next year\'s annual dividend, D1, to be $1.90 and it e

Question

Barton Industries expects next year's annual dividend, D1, to be $1.90 and it expects dividends to grow at a constant rate g = 4.3%. The firm's current common stock price, P0, is $24.30. If it needs to issue new common stock, the firm will encounter a 5.3% 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.

Explanation / Answer

Using the dividend growth model,

Cost of equity, r = D1 / P x (1 - f) + g = 1.9 / (24.3 x (1 - 5.3%)) + 4.3% = 12.56%

Without flotation cost, Cost of equity = 1.9 / 24.3 + 4.3% = 12.12%

=> Flotation cost adjustment = 12.56% - 12.12% = 0.44%

Related Questions

Navigate

• Browse (All)
• Browse B
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.