Question

**Quantitative Problem:** Barton Industries expects
next year's annual dividend, D_{1}, to be $1.80 and it
expects dividends to grow at a constant rate g = 4.7%. The firm's
current common stock price, P_{0}, is $24.70. If it needs
to issue new common stock, the firm will encounter a 5.5% flotation
cost, F. Assume that the cost of equity calculated without the
flotation adjustment is 12% and the cost of old common equity is
11.5%. What is the flotation cost adjustment that must be added to
its cost of retained earnings? Do not round intermediate
calculations. Round your answer to two decimal places.

%

What is the cost of new common equity considering the estimate
made from the three estimation methodologies? Do not round
intermediate calculations. Round your answer to two decimal
places.

%

Answer #1

Details given

D1 = $1.8

Dg =4.7%

P0 =$24.70

F = 5.5%

Cost of equity without flotation costs = 12%

Cost of Old common equity = 11.5%

**1) Cost of new common equity**

Cost of equity with flotation costs

= D1 / P0(1-F)+Dg

= 1.8 / 24.70 (1-5.5%)+4.7%

= 1.8 / 24.70 (0.945)+4.7%

= 1.8 / 22.68 + 4.7%

= 7.94% + 4.7%

**= 12.64%**

**2) Flotation cost adjustment to retained
earnings**

Flotation adjustment is the difference between cost new equity including Flotation costs less Cost of equity without flotation costs

= 12.64% - 12%

**= 0.64%**

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