Question

Answer question with excel functions showing all steps;

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 $48

Dividend growth rate 8%

Projected dividend per share next year $1.92

Underpricing per share $1.00

Flotation cost per share $2.25

Answer 1

Cost of Retained Earnings = [D1/P0] + g

= [$1.92/$48] + 0.08

= 0.04 + 0.08 = 0.12, or 12%

Cost of new common stock = [D1 / (P0 - Fc)] + g