Cost of common stock equity Ross Textiles wishes to measure its cost of common s
ID: 2719147 • Letter: C
Question
Cost of common stock equity Ross Textiles wishes to measure its cost of common
stock equity. The firm’s stock is currently selling for $57.50. The firm expects to pay
a $3.40 dividend at the end of the year (2016). The dividends for the past 5 years
are shown in the following table.
Year Dividend
2015 $3.10
2014 2.92
2013 2.60
2012 2.30
2011 2.12
After underpricing and flotation costs, the firm expects to net $52 per share on a
new issue.
a. Determine the growth rate of dividends from 2011 to 2015.
b. Determine the net proceeds, Nn, that the firm will actually receive.
c. Using the constant-growth valuation model, determine the cost of retained earnings, rr.
d. Using the constant-growth valuation model, determine the cost of new common
stock, rn.
Explanation / Answer
a.
Year Dividend Growth in dividend 2015 3.1 6.16% ((Dividend of 2015-dividend of 2014)/dividend of 2014)*100 2014 2.92 12.31% ((Dividend of 2014-dividend of 2013)/dividend of 2013)*100 2013 2.6 13.04% ((Dividend of 2013-dividend of 2012)/dividend of 2012)*100 2012 2.3 8.49% ((Dividend of 2012-dividend of 2011)/dividend of 2011)*100 2011 2.12