Question

The Cost of Capital: Cost of New Common Stock If a firm plans to issue new stock, flotation costs (investment bankers' fees) should not be ignored. There are two approaches to use to account for flotation costs. The first approach is to add the sum of flotation costs for the debt, preferred, and common stock and add them to the initial investment cost. Because the investment cost is increased, the project's expected return is reduced so it may not meet the firm's hurdle rate for acceptance of the project. The second approach involves adjusting the cost of common equity as follows: The difference between the flotation-adjusted cost of equity and the cost of equity calculated without the flotation adjustment represents the flotation cost adjustment.

Quantitative Problem: Barton Industries expects next year's annual dividend, D1, to be $2.10 and it expects dividends to grow at a constant rate g = 5%. The firm's current common stock price, P0, is $20.80. If it needs to issue new common stock, the firm will encounter a 5.1% 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? Round your answer to 2 decimal places. Do not round intermediate calculations. %

What is the cost of new common equity considering the estimate made from the three estimation methodologies? Round your answer to 2 decimal places. Do not round intermediate calculations. %

Answer #1

Determining the Cost of Capital: Cost of New Common
Stock
If a firm plans to issue new stock, flotation costs (investment
bankers' fees) should not be ignored. There are two approaches to
use to account for flotation costs. The first approach is to add
the sum of flotation costs for the debt, preferred, and common
stock and add them to the initial investment cost. Because the
investment cost is increased, the project's expected return is
reduced so it may not...

If a firm plans to issue new stock, flotation costs (investment
bankers' fees) should not be ignored. There are two approaches to
use to account for flotation costs. The first approach is to add
the sum of flotation costs for the debt, preferred, and common
stock and add them to the initial investment cost. Because the
investment cost is increased, the project's expected rate of return
is reduced so it may not meet the firm's hurdle rate for acceptance
of...

If a firm plans to issue new stock, flotation costs (investment
bankers' fees) should not be ignored. There are two approaches to
use to account for flotation costs. The first approach is to add
the sum of flotation costs for the debt, preferred, and common
stock and add them to the initial investment cost. Because the
investment cost is increased, the project's expected rate of return
is reduced so it may not meet the firm's hurdle rate for acceptance
of...

If a firm plans to issue new stock, flotation costs (investment
bankers' fees) should not be ignored. There are two approaches to
use to account for flotation costs. The first approach is to add
the sum of flotation costs for the debt, preferred, and common
stock and add them to the initial investment cost. Because the
investment cost is increased, the project's expected rate of return
is reduced so it may not meet the firm's hurdle rate for acceptance
of...

If a firm plans to issue new stock, flotation costs (investment
bankers' fees) should not be ignored. There are two approaches to
use to account for flotation costs. The first approach is to add
the sum of flotation costs for the debt, preferred, and common
stock and add them to the initial investment cost. Because the
investment cost is increased, the project's expected return is
reduced so it may not meet the firm's hurdle rate for acceptance of
the project....

The difference between the flotation-adjusted cost of equity and
the cost of equity calculated without the flotation adjustment
represents the flotation cost adjustment.
Quantitative Problem: Barton Industries expects next year's
annual dividend, D1, to be $2.20 and it expects dividends to grow
at a constant rate g = 4.6%. The firm's current common stock price,
P0, is $25.00. If it needs to issue new common stock, the firm will
encounter a 6% flotation cost, F.
a. What is the flotation...

Quantitative Problem: Barton Industries expects
next year's annual dividend, D1, to be $1.70 and it expects
dividends to grow at a constant rate g = 4%. The firm's current
common stock price, P0, is $20.20. If it needs to issue new common
stock, the firm will encounter a 4.1% 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...

Barton Industries expects next year's annual dividend,
D1, to be $2.40 and it expects dividends to grow at a
constant rate g = 4.4%. The firm's current common stock price,
P0, is $21.40. If it needs to issue new common stock,
the firm will encounter a 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...

1. Quantitative Problem: Barton Industries expects next year's
annual dividend, D1, to be $2.40 and it expects dividends to grow
at a constant rate g = 4.4%. The firm's current common stock price,
P0, is $23.20. If it needs to issue new common stock, the firm will
encounter a 4.7% 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...

Barton Industries expects next year's annual dividend, D1, to be
$2.40 and it expects dividends to grow at a constant rate g = 5%.
The firm's current common stock price, P0, is $21.80. If it needs
to issue new common stock, the firm will encounter a 5.3% 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...

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