Question

The Evanec Company's next expected dividend, D₁, is $3.74; its growth rate is 5%; and its common stock now sells for $37. New stock (external equity) can be sold to net $33.30 per share.

1. What is Evanec's cost of retained earnings, r_s? Round your answer to two decimal places. Do not round your intermediate calculations.
   r_s =  %
2. 
   
3. What is Evanec's percentage flotation cost, F? Round your answer to two decimal places.
   F =  %
4. 
   
5. What is Evanec's cost of new common stock, r_e? Round your answer to two decimal places. Do not round your intermediate calculations.
   r_e =  %

Answer 1

a) Evanec's cost of retained earnings = Expected dividend/Price of stock + Growth rate

Expected dividend = 3.74$

Growth rate = 5%

Price of stock = $37

Thus Evanec's cost of retained earnings = 3.74/37 + 5%

= 0.10108 + 0.05

= 0.15108

i.e 15.11 %

b) Floatation cost = Current stock price - Price if new equity is sold

= 37 - 33.30

= 3.70

Thus floatation cost ( as %) = Floatation cost/Current stock price

= 3.70/37

=10%

c) Evanec's cost of new common stock= Expected dividend/Price of new stock + Growth rate

Expected dividend = 3.74$

Growth rate = 5%

Price of new stock = $33.3

Thus Evanec's cost of new common stock = 3.74/33.3 + 5%

= 0.1123 + 0.05

= 0.1623

i.e 16.23%