Cost of Common Equity with and without Flotation The Evanec Company\'s next expe
ID: 2724357 • Letter: C
Question
Cost of Common Equity with and without Flotation The Evanec Company's next expected dividend, D1, is $3.77; its growth rate is 4%; and its common stock now sells for $38. New stock (external equity) can be sold to net $34.20 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
1. Cost of retained earnngs = D1 / P0 + g
= 3.77 / 38 + 0.04
= 0.139 or 14%
2. Flotation cost = 38 - 34.20 / 38 = 0.1 or 10%
3. Cost of new common stock = 3.77 / 34.20 (1- 0.1) + 0.04
= 3.77 / 30.78 + 0.04
= 0.16 or 16%.