Cost of Common Equity with and without Flotation The Evanec Company\'s next expe
ID: 2724279 • Letter: C
Question
Cost of Common Equity with and without Flotation The Evanec Company's next expected dividend, D1, is $2.71; its growth rate is 5%; and its common stock now sells for $37. New stock (external equity) can be sold to net $33.30 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
Details Amt $/% Current Stock Price 37.00 Dividend growth rate =g=5% Expected Dividend =D1= 2.71 Assume cost of equity =k So P0=D1/(k-g) 37=2.71/(k-0.05) 37k-1.85=2.71 k=12.32% So cost of retained earning =12.32% For new Equity : Net proceeds =33.30 D1-=2.71 Assume floatation cosr per share is F And Dividend growth rate =5%=g Cost of New Equity = D1/(P0-F) +g P0-F=33.33 so Cost of new Equity =2.71/33.33 +0.05 So cost of new equity = 13.13% Now : Net Proceeds =33.33 Current share price =37 So floatation cost =$3.67 per share=3.67/37= 9.92% So floatattion cost is 9.92%