Can you please help me with this question? Thank you Cost of common stock equity
ID: 2735101 • Letter: C
Question
Can you please help me with this question? Thank you
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
Answer:a N=4 (2011-2015)
PV (initial value) = -$2.12
FV (terminal value) = $3.10
solve for I (growth rate)=9.97%
Answer:b Nn=$52
Answer:c
Rr= (next dividend / Current price) + growth rate
(3.40/57.50) +0.0997
0.0591 + 0.0997= 0.1588 =15.88%
Answer:d
(3.40 / $52.00) + 0.0997
0.0654 + 0.0997= 0.1651 =16.51%