Question

Barton Industries expects next year's annual dividend,
D_{1}, to be $2.40 and it expects dividends to grow at a
constant rate g = 4.4%. The firm's current common stock price,
P_{0}, is $21.40. 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 that must be added to its cost of retained
earnings? Do not round intermediate calculations. Round your answer
to two decimal places.

%

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

%

Answer #1

Barton industries expects the next annual dividend to be $2.40. The dividends will grow at the rate of 4.4%. The current stock price is $21.40. The flotation cost involved in the new issue will be 5%. Calculate the cost of new equity as follows:

Cost of new equity = Expected Dividend / Current stock price * (1-Flotation cost) + Expected growth rate

= $2.40 / $21.40 * (1 - 5%) + 4.4%

= $2.40 / $ 21.40 * 0.95 + 4.4%

= $2.40 / 20.23 * 4.4%

= 0.118635 + 4.4%

**= 0.12385 or 12.385%**

**The cost of new equity is 12.385%**

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