Question

Cost of Common Equity with and without Flotation

The Evanec Company's next expected dividend, D1, is $3.18; its growth rate is 6%; and its common stock now sells for $36. New stock (external equity) can be sold tonet $32.40 a share.

What is Evanec's percentage flotation cost, F?

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Answer #2

a.Cost of retained earnings = (D1/Current price)+Growth rate

 

=($3.18 / $36 )+0.06

= 0.0883+ 0.06

= 0.1483

=14.83%

 

b.% flotation cost= (Current price - Net price)/Current price

 

=(36 – 32.40)/ 36

 

=10%

 

c. Cost of new common stock= (D1/Net price) + Growth rate

 

(3.18/32.40) + 0.06

= 0.0981 + 0.06

= 0.1581

=15.81 %


answered by: Sherly JN-Baptiste
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