Question

# Cost of common stock equity?? Ross Textiles wishes to measure its cost of common stock equity....

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, rs .

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

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%

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