Question

The Evanec Company's next expected dividend, D1, is $2.70; its growth rate is 5%; and its common stock now sells for $36. New stock (external equity) can be sold to net $30.60 per share. What is Evanec's cost of retained earnings, rs? Round your answer to two decimal places. rs = %

What is Evanec's percentage flotation cost, F? Round your answer to two decimal places. F = %

What is Evanec's cost of new common stock, re? Round your answer to two decimal places. re = %

Answer 1

Answer a.

D1 = $2.70
Growth Rate, g = 5%
Current Price, P = $36

Cost of Retained Earnings, rs = D1 / P + g
Cost of Retained Earnings, rs = $2.70 / $36 + 0.05
Cost of Retained Earnings, rs = 0.125
Cost of Retained Earnings, rs = 12.50%

Answer b.

Current Stock Price, P = $36
New Stock Price, PN = $30.60

Let flotation cost be F

Current Stock Price * (1 - F) = New Stock Price
$36 * (1 - F) = $30.60
1 - F = 0.85
F = 0.15
F = 15%

Flotation cost is 15%

Answer c.

D1 = $2.70
Growth Rate, g = 5%
New Stock Price, PN = $30.60

Cost of New Common Stock, re = D1 / PN + g
Cost of New Common Stock, re = $2.70 / $30.60 + 0.05
Cost of New Common Stock, re = 13.82%