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Homework answers / question archive / 10-7 COST OF COMMON EQUITY WITH AND WITHOUT FLOTATION The Evanec Company's next expected dividend, DI, is $3

10-7 COST OF COMMON EQUITY WITH AND WITHOUT FLOTATION The Evanec Company's next expected dividend, DI, is $3

Finance

10-7 COST OF COMMON EQUITY WITH AND WITHOUT FLOTATION The Evanec Company's next expected dividend, DI, is $3.18; its growth rate is 6%; and its common stock now sells for $36.00. New stock (external equity) can be sold to net $32.40 per share. a. What is Evanec's cost of retained earnings, rs? b. What is Evanec's percentage flotation cost, F? c, What is Evanec's cost of new common stock, r„? 
 

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a. Computation of Evanec's Cost of Retained Earnings:

Cost of Retained Earnings = Dividend for Next Year/Common Stock Price per Share + Growth Rate

= $3.18/36+6%

= 8.83% + 6%

Cost of Retained Earnings = 14.83%

 

b. Compuation of Avanec's Percentage of Flotation Cost:

Percentage of Flotation Cost = (Common Stock Price per Share - New Stock Price per Share)/Common Stock Price per Share*100

= ($36-$32.40)/$36 * 100

Percentage of Flotation Cost = 10%

 

c. Computation of Cost of New Common Stock:

Cost of New Common Stock = Dividend for Next Year/Common Stock Price per Share + Growth Rate

= $3.18 / $32.40 + 6%

= 9.81% + 6%

Cost of New Common Stock = 15.81%

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