Question

Quantitative Problem: Barton Industries expects next year's annual dividend, D1, to be $1.70 and it expects dividends to grow at a constant rate g = 4%. The firm's current common stock price, P0, is $20.20. If it needs to issue new common stock, the firm will encounter a 4.1% flotation cost, F. Assume that the cost of equity calculated without the flotation adjustment is 12% and the cost of old common equity is 11.5%. What is the flotation cost adjustment that must be added to its cost of retained earnings? Round your answer to 2 decimal places. Do not round intermediate calculations.
%

What is the cost of new common equity considering the estimate made from the three estimation methodologies? Round your answer to 2 decimal places. Do not round intermediate calculations.
%

Answer 1

Cost of new equity after considering floatation cost would be
Using the dividend growth model
Cost of equity = Next year dividend/Current share price (1- floatation cost) + Growth rate
	1.70/20.20(1-0.041) + 0.04
	Solving above would be
	12.78%
Floatation cost adjustment factor to be made = Cost of New Equity - Cost of Old Equity
				12.78%-11.50%
				1.28%
Hence the floatation cost adjustment to be added will be 1.28% and cost of new equity would be 12.78%