Question

# Retained earnings versus new common stock   Using the data for a firm shown in the following​...

Retained earnings versus new common stock   Using the data for a firm shown in the following​ table, calculate the cost of retained earnings and the cost of new common stock using the​ constant-growth valuation model.

 Current market price per share Dividend growth rate Projected dividend per share next year Underpricing per share Flotation cost per share
 ​\$60.00 77​% ​\$1.80 ​\$2.00 ​\$2.00

a The cost of retained earnings is? ​(Round to two decimal​ places.)

b.  The cost of new common stock is Round to two decimal​ places.)

Given,

Current price = \$60

Dividend growth rate (g) = 77% or 0.77

Projected dividend = \$1.80

Under pricing = \$2

Flotation cost = \$2

Solution :-

(a)

Cost of retained earnings = (projected dividend current price) + g

= (\$1.80 \$60) + 0.77

= 0.03 + 0.77 = 0.80 or 80.00%

(b)

Cost of new common stock = [projected dividend (current price - under pricing - flotation cost)] + g

= [\$1.80 (\$60 - \$2 - \$2)] + 0.77

= [\$1.80 \$56] + 0.77

= 0.0321 + 0.77 = 0.8021 or 80.21%

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