COST OF COMMON EQUITY WITH AND WITHOUT FLOTATION The Evanec Company\'s next expe
ID: 2798921 • Letter: C
Question
COST OF COMMON EQUITY WITH AND WITHOUT FLOTATION
The Evanec Company's next expected dividend, D1, is $3.35; its growth rate is 4%; and its common stock now sells for $40. New stock (external equity) can be sold to net $36.00 per share.
What is Evanec's cost of retained earnings, rs? Round your answer to two decimal places. Do not round your intermediate calculations.
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. Do not round your intermediate calculations.
re = %
Explanation / Answer
1.cost of retained earnings=(D1/P0)+Growth rate
=(3.35/40)+0.04=12.38%(Approx)
2.% floatation cost=(40-36)/40=10%
3. cost of new common stock=(D1/P0(1-floatation cost))+growth rate
=(3.35/36)+0.04=13.31%(Approx)