Quantitative Problem: Barton Industries expects next year\'s annual dividend, D1
ID: 2789559 • Letter: Q
Question
Quantitative Problem: Barton Industries expects next year's annual dividend, D1, to be $1.60 and it expects dividends to grow at a constant rate g = 4.7%. The firm's current common stock price, P0, is $23.20. If it needs to issue new common stock, the firm will encounter a 6% flotation cost, F. Assume that the cost of equity calculated without the flotation adjustment is 12% and the cost of old common equity is 11.5%. What is the flotation cost adjustment that must be added to its cost of retained earnings? Round your answer to 2 decimal places. Do not round intermediate calculations.
______ %
What is the cost of new common equity considering the estimate made from the three estimation methodologies? Round your answer to 2 decimal places. Do not round intermediate calculations.
______ %
Explanation / Answer
Current Stock price = $23.20.
Floatation cost = 6%
Net proceed from sale of stock = $23.20 × (1 - 6%)
= $21.81.
Floatation adjusted cost of equity = ($1.60 / $21.81) + 4.70%
= 7.34% + 4.70%
= 12.04%
Floatation adjusted cost of equity is 12.04%.
flotation cost adjustment = 12.04% - 11.50%
= 0.54%
flotation cost adjustment is 0.54%.
b.
Cost of new equity is 12.04%.