Barton Industries expects next year\'s annual dividend, D 1 , to be $2.40 and it

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 = 4.2%. The firm's current common stock price, P0, is $21.40. If it needs to issue new common stock, the firm will encounter a 4.1% 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.
%

Barton Industries expects next year's annual dividend, D1, to be $2.40 and it expects dividends to grow at a constant rate g = 4.2%. The firm's current common stock price, P0, is $21.40. If it needs to issue new common stock, the firm will encounter a 4.1% 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

Floatation cost adjustment to be added = cost of new common stock - cost of equity without floatation

cost of new common stock = D/P(1-F) + g

d-dividend

P-stock price

F-floatation cost %

g-dividend growth rate

so cost = 2.4/(21.4(1-.041) + .042 = 15.89%

So, floatation cost adjustment to be added = 15.89% - 12% = 3.89%

Cost of new common equity = cost of old common equity + floatation cost adjustment

= 11.5% + 3.89% = 15.39%

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