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?

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 %

[REMOVED]

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