Question

Ross Textiles wishes to measure its cost of common stock equity. The​ firm's stock is currently selling for ​$61.65. The firm just recently paid a dividend of ​$4.14. The firm has been increasing dividends regularly. Five years​ ago, the dividend was just ​$3.04. After underpricing and flotation​ costs, the firm expects to net ​$56.72 per share on a new issue.

a.  Determine average annual dividend growth rate over the past 5 years. Using that growth​ rate, what dividend would you expect the company to pay next​ year?

b. Determine the net​ proceeds, Nn​, that the firm will actually receive.

c.  Using the​ constant-growth valuation​ model, determine the required return on the​ company's stock, r Subscript s​, which should equal the cost of retained​ earnings, r Subscript r.

d.  Using the​ constant-growth valuation​ model, determine the cost of new common​ stock, r Subscript n.

Answer 1