Cost of common stock equity Ross Textiles wishes to meesure Its cost of common s
ID: 2795503 • Letter: C
Question
Cost of common stock equity Ross Textiles wishes to meesure Its cost of common stock equity. The fim's stock s currendy selling for $47.09. The flm expects to pay a $3.42 dvidend at the end of the year (2016). The divldands for the past 5 years are shown in the following table Click on the loon located on the top-right comer of the deta table below in order to copy its contents into a spreadahest) Year Dividend per Share 201 2014 2013 2012 2011 $3.09 52.64 32.52 32.22 52.06 AHar undarpricing and fiotation costs, the firm 6xpects to net $44 26 par shara on a naw issue a. Determine the growth rate of dividends from 2011 to 2015 h notermino tha nat nrnconde N that ho firmillallu a. The growth rate of dividends from 2011 to 2015 is %. (Round to to decimal pleces.) b. The net proceeds N , the firm will actually receive ara $L (Round to two decimal places ) c. Using the constanl-growth valuation model thcsfee erings, is d. Using the constant-groth valuation model, the cost ol new common slock Round to two decimal places.) .'",b% (Round to two decimal places)Explanation / Answer
a) Growth rate, g = (3.09 / 2.06)^(1/4) - 1 = 10.67%
b) Net Proceed = $44.26 after underpricing and flotation cost.
c) Cost of retained earnings = D1 / P + g = 3.42 / 47.09 + 10.67% = 17.93%
d) Cost of new equity = D1 / N + g = 3.42 / 44.26 + 10.67% = 18.40%