Question

Barton Industries expects next year's annual dividend,
D_{1}, to be $2.10 and it expects dividends to grow at a
constant rate g_{L} = 4.9%. 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 5.2% 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 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

**Answer : Calculation of Flotation Cost adjustment
that must be added to retained earnings:**

Cost of Equity = {Expected Dividend / [Current Price * (1 - Flotation Cost)]} + growth rate

= {2.10 / [24.60 * (1 - 0.052)]} + 0.049

= {2.10 / 23.3208} + 0.049

= 0.13904836883 or 13.90%

Cost of equity calculated without the flotation adjustment is 12% and the cost of old common equity is 11.5%.

**Flotation Cost adjustment = 13.90% -
12%**

**= 1.90%**

**(b.) Cost of New Common Equity = Cost of old
common Equity + Flotation Cost
adjustment**

**= 11.5% + 1.90%**

**= 13.40%**

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