Question

Barton Industries expects next year's annual dividend, D1, to be $2.20 and it expects dividends to...

Barton Industries expects next year's annual dividend, D1, to be $2.20 and it expects dividends to grow at a constant rate g = 5%. The firm's current common stock price, P0, is $20.00. If it needs to issue new common stock, the firm will encounter a 5.8% flotation cost, F. 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. Please show work

Homework Answers

Answer #1

Given about Barton Industries,

Next year's dividend D1 = $2.2

dividend growth g = 5%

current stock price P0 = $20

Flotation cost = 5.8%

Firms cost of equity without flotation using constant dividend growth model is

Cost of equity = D1/P0 + g = 2.2/20 + 0.05 = 16%

Cost of new equity using flotation in constant dividend growth model is

Cost of new equity = D1/(P0*(1-F)) + g = 2.2/(20*(1-0.058)) + 0.05 = 16.68%

So, flotation cost adjustment = Cost of new equity - cost of old equity = 16.68% - 16% = 0.68%

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Barton Industries expects next year's annual dividend, D1, to be $2.20 and it expects dividends to...
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...
Barton Industries expects next year's annual dividend, D1, to be $2.40 and it expects dividends to...
Barton Industries expects next year's annual dividend, D1, to be $2.40 and it expects dividends to grow at a constant rate g = 4.4%. The firm's current common stock price, P0, 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...
Barton Industries expects next year's annual dividend, D1, to be $2.40 and it expects dividends to...
Barton Industries expects next year's annual dividend, D1, to be $2.40 and it expects dividends to grow at a constant rate g = 5%. The firm's current common stock price, P0, is $21.80. If it needs to issue new common stock, the firm will encounter a 5.3% 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 $1.60 and it expects dividends to...
Barton Industries expects next year's annual dividend, D1, to be $1.60 and it expects dividends to grow at a constant rate g = 4%. The firm's current common stock price, P0, is $20.70. If it needs to issue new common stock, the firm will encounter a 5.7% 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...
Barton Industries expects next year's annual dividend, D1, to be $2.00 and it expects dividends to...
Barton Industries expects next year's annual dividend, D1, to be $2.00 and it expects dividends to grow at a constant rate g = 4%. The firm's current common stock price, P0, is $21.90. If it needs to issue new common stock, the firm will encounter a 4.9% 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 $2.50 and it expects dividends to...
Barton Industries expects next year's annual dividend, D1, to be $2.50 and it expects dividends to grow at a constant rate g = 4.2%. The firm's current common stock price, P0, is $22.90. If it needs to issue new common stock, the firm will encounter a 5.9% 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...
1a Barton Industries expects next year's annual dividend, D1, to be $2.30 and it expects dividends...
1a Barton Industries expects next year's annual dividend, D1, to be $2.30 and it expects dividends to grow at a constant rate g = 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 4.5% flotation cost, F. 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. _____%...
Quantitative Problem: Barton Industries expects next year's annual dividend, D1, to be $2.00 and it expects...
Quantitative Problem: Barton Industries expects next year's annual dividend, D1, to be $2.00 and it expects dividends to grow at a constant rate g = 4.7%. The firm's current common stock price, P0, is $25.00. If it needs to issue new common stock, the firm will encounter a 4.4% flotation cost, F. 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....
Quantitative Problem: Barton Industries expects next year's annual dividend, D1, to be $1.70 and it expects...
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...
Quantitative Problem: Barton Industries expects next year's annual dividend, D1, to be $1.60 and it expects...
Quantitative Problem: Barton Industries expects next year's annual dividend, D1, to be $1.60 and it expects dividends to grow at a constant rate g = 4.4%. The firm's current common stock price, P0, is $22.00. If it needs to issue new common stock, the firm will encounter a 5.5% 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...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT