Oyceee Electronics wants you to calculate its cost of common stock

Finance Jun 23, 2021

Oyceee Electronics wants you to calculate its cost of common stock. During the next 12 months, the company expects to pay dividends (D₁) of $3.50 per share, and the current price of its common stock is $72 per share. The expected growth rate is 5 percent. (Do not round intermediate calculations. Round the final answers to 2 decimal places.)

a. Compute the cost of retained earnings (K_e).

Cost of retained earnings _____ %

b. If a $3.0 flotation cost is involved, compute the cost of new common stock (K_n).

Cost of new common stock ______%

Expert Solution

Computation of Cost of Retained Earnings:

Cost of Retained Earnings=(D1/Current price)+Growth rate

=(3.5/72)+0.05

=9.86%

Computation of Cost of New Common Stock:

Cost of New Stock=(D1/Current price-Flotation cost)+Growth rate

=(3.5/(72-3))+0.05

=(3.5/69)+0.05

=10.07%

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