Question

Cost of common stock equity?? Ross Textiles wishes to measure its cost of common stock equity. The? firm's stock is currently selling for ?$41.3641.36. The firm expects to pay a ?$3.293.29 dividend at the end of the year? (2016). The dividends for the past 5 years are shown in the following? table:

Year Dividend per Share

2015 $2.98

2014 ?$2.68

2013 ? $2.38

2012 $2.22

2011 ? $2.01

After underpricing and flotation? costs, the firm expects to net ?$36.81 per share on a new issue. a.??Determine the growth rate of dividends from 2011 to 2015. b. Determine the net? proceeds, Nn?, that the firm will actually receive. c.??Using the? constant-growth valuation? model, determine the cost of retained? earnings, r Subscript srs. d.??Using the? constant-growth valuation? model, determine the cost of new common? stock, r Subscript nrn.

Answer 1

a.

Growth rate in dividend is calculated in excel and screen shot provided below:

Growth rate in dividend is 10.36%.

b.

Currently stock is trading at $41.36 and after adjusting floatation cost, net proceed from sale of equity is $36.81.

c.

Cost of retained earning = (Expected dividend / Current Stock price) + Growth rate

= ($3.29 / $41.36) + 10.36%

= 7.95% + 10.36%

= 18.32%

Cost of retained earning is 18.32%.

d.

Cost of new equity = (Expected dividend / Net proceed) + Growth rate

= ($3.29 / $36.81) + 10.36%

= 8.94% + 10.36%

= 19.30%

Cost of new equity is 19.30%.