Assume that today is January 1, 2013. Ross textiles wishes to measure its cost o
ID: 2625000 • Letter: A
Question
Assume that today is January 1, 2013. Ross textiles wishes to measure its cost of common stock equity. The firm's stock is currently selling for $57.37. The firm expects to pay $3.44 dividend at the end of the year (2013). The growth rate of dividends is 8.42%. After underpricing and flotation costs, the firm expect to net $52.78 per share on a new issue.
a. Using the constant-growth valuation model determine the cost of retained earnings rs.
b. Using the constant-growth valuation model determine the cost of new commone stock rn.
Explanation / Answer
a) cost of retained earnings rs = D2013/P0 + g = 3.44/57.37 + 0.0842 = 0.0599 + 0.0842 = 0.1441 = 14.41 %
b) cost of new commone stock rn = D2013/Nn + g = 3.44/52.78 + 0.0842 = 0.0651 + 0.0842 = 0.907 = 0.1493 = 14.93 %