Question

P10.07

The Evanec Company's next expected dividend, D1, is $3.66; its growth rate is 7%; and its common stock now sells for $39. New stock (external equity) can be sold to net $33.15 per share.

A. What is Evanec's cost of retained earnings, rs? Round your answer to two decimal places. Do not round your intermediate calculations. rs = %

B. What is Evanec's percentage flotation cost, F? Round your answer to two decimal places. F = %

C. What is Evanec's cost of new common stock, re? Round your answer to two decimal places. Do not round your intermediate calculations. re = %

Answer 1

A. Cost of Retained Earnings

Cost of Retained Earning = Dividend Next Year/SharePrice + Growth Rate
= 3.66/39 + 0.07 = 16.38% ( rounded off to two decimal places)

B. Floating Cost

Floatation Cost = (Old Share Price - New Share Price)/Old Share Price
= (39-33.15)/39 = 0.15 or 15.00%

C. Cost of new common Stock

Cost of new common stock = Dividend Next Year/NewSharePrice + Growth Rate
= 3.66/33.15 + 0.07 = .1804 or 18.04%(rounded off to two decimals)

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