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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 $3.18; 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„?
Expert Solution
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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