Cost of Common Equity with and without Flotation The Evanec Company\'s next expe
ID: 2783504 • Letter: C
Question
Cost of Common Equity with and without Flotation
The Evanec Company's next expected dividend, D1, is $3.74; its growth rate is 7%; and its common stock now sells for $37. New stock (external equity) can be sold to net $35.15 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
Next Expected Dividend = 3.74, Stock Price = 37, Growth Rate = 7%
Cost of Retained Earnings = (Next expected dividend/Stock price) + Growth rate = (3.74/37) + 7% = 17.11%
Percentage Floatation cost = ((current stock price - net new stock price)/current stock price) * 100% = ((37 - 35.15)/37) * 100% = (1.85/37) * 100% = 5%
Cost of new common stock = (Next Expected Dividend/net new stock price) + growth rate = (3.74/35.15) + 7% = 17.64%