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

?$56.69. The firm expects to pay a? $3.21 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	$2.94
2014	$2.61
2013	$2.31
2012	$2.26
2011	$2.07

After underpricing and flotation costs, the firm expects to net $53.29 per share on a new issue.

a. Determine the growth rate of dividends from 2011 to 2015.

b.Determine the net proceeds, N _n, that the firm will actually receive.

c. Using the constant-growth valuation model, determine the cost of retained earnings, r_s .

d. Using the constant-growth valuation model, determine the cost of new common stock, r_n .

Answer 1

a.

Growth rate from 2011-2012=2.26/2.07-1=9.18%

Growth rate from 2012-2013=2.31/2.26-1=2.21%

Growth rate from 2013-2014=2.61/2.31-1=12.99%

Growth rate from 2014-2015=2.94/2.61-1=12.64%

average growth rate=(9.18%+2.21%+12.99%+12.64%)/4=9.255%

b.

Determine the net proceeds, N n, that the firm will actually receive=53.29

c.

determine the cost of retained earnings=3.21/56.69+9.255%=14.92%

d.

the cost of new common stock=3.21/53.29+9.255%=15.28%

the above is answer..