Cost of Common Equity with and without Flotation The Evanec Company\'s next expe
ID: 2724312 • Letter: C
Question
Cost of Common Equity with and without Flotation
The Evanec Company's next expected dividend, D1, is $2.97; its growth rate is 4%; and its common stock now sells for $32. New stock (external equity) can be sold to net $28.80 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 equity = (expected dividend/maket price)+growth rate =( 2.97/32)+.04 = .1328*100 = 9.28%
cost of retained earnings = 9.28% as cost of retained earning is equal to cost of equity capital
Evanec's percentage flotation cost
32 - 28.8 = 3.2
percentage flotation cost = 3.2/32 = .1*100 = 10%
cost of new common stock = (expected dividend/maket price)+growth rate =( 2.97/28.8)+.04 = .1328*100 = 10.31%