Question

quantitative Problem: Barton tndustres expects next year's annual dividend, D1. to be s 160 and it expects dividends to row at a coestant rate g-4.7%. The firm's arret commen tok roe, Pa·s S22.30. needs to issue ne common stock the firm will encounter a 4.6% notation cost F. Assume that the cast of equity daiculated without the flotation ad usment is 12% and the cost of old common eory is 11.5%. wh is the flotation cost adjustment that must be added to its cost of retained earnings? Round your answer to 2 decimal places. Do net round intermediate caloulations ity considering the estimate made from the three estination methodologies? Round your nwer to 2 deom al piace, e not round inte mediate caeuasons what is the cost of new common Contisue without saving

Answer 1

a). rE = [D1/{P0*(1 - F)}] + g

= [$1.60/{$22.30*(1 - 0.046)}] + 0.047 = 0.0752 + 0.047 = 0.1222, or 12.22%

Flotation cost adjustment = 12.22% - 12% = 0.22%.

b). Cost of retained earnings, including adjustment = 11.5% + 0.22% = 11.72%

The 3 estimates of cost of equity therefore are 12%, 11.72%, and 12.22%

The most appropriate estimate for the cost of new equity is 12.22%. It is based on an estimate of the cost of new equity, rather than retained earnings, and incorporates the flotation cost.