Cost of Common Equity with and without Flotation The Evanec Company\'s next expe
ID: 2718704 • Letter: C
Question
Cost of Common Equity with and without Flotation
The Evanec Company's next expected dividend, D1, is $3.60; its growth rate is 5%; and its common stock now sells for $32. New stock (external equity) can be sold to net $30.40 per share.
What is Evanec's cost of retained earnings, rs? Round your answer to two decimal places.
rs = %
What is Evanec's percentage flotation cost, F? Round your answer to two decimal places.
F = %
What is Evanec's cost of new common stock, re? Round your answer to two decimal places.
re = %
Explanation / Answer
Cost of retained earnings can be computed by using following formula:
rs= D1/MP+G
D1 = Dividend for the year. i,e $ 3.6
MP= Market price ie,$30
G= Growth rate ie,5%
rs=Cost of retained earnings
Substitute above values in formula
rs= 3.6/32+5%
Therefore ,Cost of retained earnings (rs)
=16%
Floating cost
It can be computed as follows
Flaoting cost= (current market price-Funds going to comoany) Current market price
=(32-30.4)/32
Flaoting cost (F) =5%
Cost of New common stock =
re= D1/{MP(1-F)}+G
=3.2/32(1-.05)+5%
=14.5%