Question

**Determining the Cost of Capital: Cost of New Common
Stock**

If a firm plans to issue new stock, flotation costs (investment
bankers' fees) should not be ignored. There are two approaches to
use to account for flotation costs. The first approach is to add
the sum of flotation costs for the debt, preferred, and common
stock and add them to the initial investment cost. Because the
investment cost is increased, the project's expected return is
reduced so it may not meet the firm's hurdle rate for acceptance of
the project. The second approach involves adjusting the cost of
common equity as follows:

The difference between the flotation-adjusted cost of equity and
the cost of equity calculated without the flotation adjustment
represents the flotation cost adjustment.

**Quantitative Problem:** Barton Industries expects
next year's annual dividend, D_{1}, to be $2.30 and it
expects dividends to grow at a constant rate g_{L} = 4%.
The firm's current common stock price, P_{0}, is $24.60. If
it needs to issue new common stock, the firm will encounter a 5.6%
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? Round your answer to 2
decimal places. Do not round intermediate calculations.

%

Answer #1

The Cost of Capital: Cost of New Common Stock If a firm plans to
issue new stock, flotation costs (investment bankers' fees) should
not be ignored. There are two approaches to use to account for
flotation costs. The first approach is to add the sum of flotation
costs for the debt, preferred, and common stock and add them to the
initial investment cost. Because the investment cost is increased,
the project's expected return is reduced so it may not meet...

If a firm plans to issue new stock, flotation costs (investment
bankers' fees) should not be ignored. There are two approaches to
use to account for flotation costs. The first approach is to add
the sum of flotation costs for the debt, preferred, and common
stock and add them to the initial investment cost. Because the
investment cost is increased, the project's expected return is
reduced so it may not meet the firm's hurdle rate for acceptance of
the project....

If a firm plans to issue new stock, flotation costs (investment
bankers' fees) should not be ignored. There are two approaches to
use to account for flotation costs. The first approach is to add
the sum of flotation costs for the debt, preferred, and common
stock and add them to the initial investment cost. Because the
investment cost is increased, the project's expected rate of return
is reduced so it may not meet the firm's hurdle rate for acceptance
of...

If a firm plans to issue new stock, flotation costs (investment
bankers' fees) should not be ignored. There are two approaches to
use to account for flotation costs. The first approach is to add
the sum of flotation costs for the debt, preferred, and common
stock and add them to the initial investment cost. Because the
investment cost is increased, the project's expected rate of return
is reduced so it may not meet the firm's hurdle rate for acceptance
of...

If a firm plans to issue new stock, flotation costs (investment
bankers' fees) should not be ignored. There are two approaches to
use to account for flotation costs. The first approach is to add
the sum of flotation costs for the debt, preferred, and common
stock and add them to the initial investment cost. Because the
investment cost is increased, the project's expected rate of return
is reduced so it may not meet the firm's hurdle rate for acceptance
of...

Barton Industries expects next year's annual dividend,
D1, to be $2.10 and it expects dividends to grow at a
constant rate gL = 4.9%. The firm's current common stock
price, P0, is $24.60. If it needs to issue new common
stock, the firm will encounter a 5.2% 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...

Barton Industries expects next year's annual dividend,
D1, to be $1.70 and it expects dividends to grow at a
constant rate gL = 4.9%. The firm's current common stock
price, P0, is $25.00. If it needs to issue new common
stock, the firm will encounter a 4.7% 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...

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 gL = 4.7%.
The firm's current common stock price, P0, is $24.50. If
it needs to issue new common stock, the firm will encounter a 5%
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...

Barton Industries expects next year's annual dividend,
D1, to be $2.20 and it expects dividends to grow at a
constant rate gL = 4.5%. The firm's current common stock
price, P0, is $20.30. If it needs to issue new common
stock, the firm will encounter a 5.4% 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...

The difference between the flotation-adjusted cost of equity and
the cost of equity calculated without the flotation adjustment
represents the flotation cost adjustment.
Quantitative Problem: Barton Industries expects next year's
annual dividend, D1, to be $2.20 and it expects dividends to grow
at a constant rate g = 4.6%. The firm's current common stock price,
P0, is $25.00. If it needs to issue new common stock, the firm will
encounter a 6% flotation cost, F.
a. What is the flotation...

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