The Evanec Company\'s next expected dividend, D1, is $3.62; its growth rate is 6

Question

The Evanec Company's next expected dividend, D1, is $3.62; its growth rate is 6%; and its common stock now sells for $35. New stock (external equity) can be sold to net $33.25 per share.

a. What is Evanec's cost of retained earnings, rs? Round your answer to two decimal places.
rs =__________ %

b. What is Evanec's percentage flotation cost, F? Round your answer to two decimal places.
F =_______ %

c. What is Evanec's cost of new common stock, re? Round your answer to two decimal places.
re = _______

Explanation / Answer

a.    Cost of retained earnings = Dividend/Selling price of common stokc + Growth rate             Here, Dividend is $3.62                       Selling price is $35.                         Growth rate is 6%    Cost of retained earnings = $3.62/$35 + 0.06                                                 = 0.1034 + 0.06                                                 = 0.1634                                                 = 16.34%    Therefore cost of retained earnings is 16.34% b.    Flotation costs = Common stock now sell - New stock can be sold                               = $35 - $33.25                               = $1.75    Percentate of flotation cost = Flotation cost/Selling price(Now)                                                    = $1.75/$35                                                    = 0.05 (or) 5% Therefore percentage of flotation cost is 5.00% c.    New common stock retained earingins = Dividend/Sellling price of new common stock + g                                                                      = $3.62/$33.25 + 0.06                                                                      = 0.1089 + 0.06                                                                      = 0.1689                                                                      = 16.89%    Therefore new common stock retained earnings is 16.89%.

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