Question

BJK Inc.’s common stock currently sells for $150.00 per share, the company expects to earn $27.50...

BJK Inc.’s common stock currently sells for $150.00 per share, the company expects to earn $27.50 per share during the current year, its expected payout ratio is 70%, and its expected constant growth rate is 6.00%. New stock can be sold to the public at the current price, but a flotation cost of 7.7% would be incurred. By how much would the cost of new stock exceed the cost of retained earnings?

Homework Answers

Answer #1

Expected Dividend (D1) = Expected earnings x Dividend payout = $27.50 x 70% = $19.25

Growth rate (g) = 6%, Current stock price (P0) = $150,

Flotation costs (F) = $150 x 7.7% = $11.55

Only difference between cost of retained earnings and cost of new common stock is the Flotation costs which will incurred only when issuing new stock.

Cost of retained earnings = [ D1 / P0 ] + g = [ $19.25 / $150 ] + 0.06 = 0.18833333333 or 18.83%

Cost of new common stock = [ D1 / (P0 - F) ] + g = [ $19.25 / ($150 - $11.55) ] + 0.06 = 0.19903936439 or 19.90%

Excess cost of new common stock = 19.90% - 18.83% = 1.07%

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
BJK Inc.’s common stock currently sells for $150.00 per share, the company expects to earn $27.50...
BJK Inc.’s common stock currently sells for $150.00 per share, the company expects to earn $27.50 per share during the current year, its expected payout ratio is 70%, and its expected constant growth rate is 6.00%. New stock can be sold to the public at the current price, but a flotation cost of 7.7% would be incurred. By how much would the cost of new stock exceed the cost of retained earnings?
Chooc possesses common stock selling for $45.00 per share, for some reasons, Chooc expects to earn...
Chooc possesses common stock selling for $45.00 per share, for some reasons, Chooc expects to earn $3.75 per share during the current year, and he expects a payout ratio is 70%, and constant growth rate is 6.00%. He also will issue new stock to be sold to the public at the current price, with a flotation cost of 8.5% By how much would the cost of new stock exceed the cost of retained earnings (old common stock)?
Trahern Baking Co. common stock sells for $33.45 per share. It expects to earn $3.00 per...
Trahern Baking Co. common stock sells for $33.45 per share. It expects to earn $3.00 per share during the current year, its expected dividend payout ratio is 60%, and its expected constant dividend growth rate is 6.0%. New stock can be sold to the public at the current price, but a flotation cost of 4.5% would be incurred. What would be the cost of equity from new common stock? 19.57% 21.08% 21.70% 15.78% 14.05%
LePage Co. expects to earn $2.50 per share during the current year, its expected dividend payout...
LePage Co. expects to earn $2.50 per share during the current year, its expected dividend payout ratio is 65%, its expected constant dividend growth rate is 6.0%, and its common stock currently sells for $24.75 per share. New stock can be sold to the public at the current price, but a flotation cost of 9% would be incurred. What would be the cost of equity from new common stock?
Yasheen Company expects to earn $3.50 per share during the current year, its expected dividend payout...
Yasheen Company expects to earn $3.50 per share during the current year, its expected dividend payout ratio is 66%, its expected constant dividend growth rate is 6.0%, and its common stock currently sells for $32.50 per share. New stock can be sold to the public at the current price, but a flotation cost of 5% would be incurred. What would be the cost of equity from new common stock? a. 13.37% b. 13.70% c. 13.98% d. 13.74% e. 13.48%
COST OF COMMON EQUITY WITH FLOTATION Banyan Co.’s common stock currently sells for $54.75 per share....
COST OF COMMON EQUITY WITH FLOTATION Banyan Co.’s common stock currently sells for $54.75 per share. The growth rate is a constant 9.6%, and the company has an expected dividend yield of 6%. The expected long-run dividend payout ratio is 20%, and the expected return on equity (ROE) is 12%. New stock can be sold to the public at the current price, but a flotation cost of 15% would be incurred. What would be the cost of new equity? Round...
Banyan Co.’s common stock currently sells for $37.75 per share. The growth rate is a constant...
Banyan Co.’s common stock currently sells for $37.75 per share. The growth rate is a constant 7%, and the company has an expected dividend yield of 4%. The expected long-run dividend payout ratio is 30%, and the expected return on equity (ROE) is 10.0%. New stock can be sold to the public at the current price, but a flotation cost of 10% would be incurred. What would be the cost of new equity? Do not round intermediate calculations. Round your...
Banyan Co.’s common stock currently sells for $60.75 per share. The growth rate is a constant...
Banyan Co.’s common stock currently sells for $60.75 per share. The growth rate is a constant 8%, and the company has an expected dividend yield of 4%. The expected long-run dividend payout ratio is 20%, and the expected return on equity (ROE) is 10.0%. New stock can be sold to the public at the current price, but a flotation cost of 10% would be incurred. What would be the cost of new equity? Do not round intermediate calculations. Round your...
Banyan Co.’s common stock currently sells for $57.75 per share. The growth rate is a constant...
Banyan Co.’s common stock currently sells for $57.75 per share. The growth rate is a constant 5%, and the company has an expected dividend yield of 5%. The expected long-run dividend payout ratio is 50%, and the expected return on equity (ROE) is 10.0%. New stock can be sold to the public at the current price, but a flotation cost of 15% would be incurred. What would be the cost of new equity? Do not round intermediate calculations. Round your...
Banyan Co.’s common stock currently sells for $43.75 per share. The growth rate is a constant...
Banyan Co.’s common stock currently sells for $43.75 per share. The growth rate is a constant 6%, and the company has an expected dividend yield of 4%. The expected long-run dividend payout ratio is 25%, and the expected return on equity (ROE) is 7%. New stock can be sold to the public at the current price, but a flotation cost of 10% would be incurred. What would be the cost of new equity? Do not round intermediate calculations. Round your...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT