Question

The Evanec Company's next expected dividend, D₁, is $3.97; its growth rate is 4%; and its common stock now sells for $38.00. New stock (external equity) can be sold to net $36.10 per share.

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

   r_s =   %

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

   F =   %

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

   r_e =   %

Answer 1

Answer to Part a.
Cost of Retained Earnings = Expected Dividend / Current Price + Growth Rate
Cost of Retained Earnings = $3.97 / $38.00 + 0.04
Cost of Retained Earnings = 0.1045 + 0.04
Cost of Retained Earnings = 0.1445
or Cost of Retained Earnings = 14.45%

Answer to Part b.
Flotation Cost = Current Price – Net Price
Flotation Cost = $38.00 - $36.10
Flotation Cost = $1.90

Percentage Flotation Cost = Flotation Cost / Current Price * 100
Percentage Flotation Cost = $1.90 / $38.00
Percentage Flotation Cost = 5.00%

Answer to Part c.
Cost of New Common Stock = Expected Dividend / Net Price + Growth Rate
Cost of New Common Stock = $3.97 / $36.10 + 0.04
Cost of New Common Stock = 0.1100 + 0.04
Cost of New Common Stock = 0.1500
or Cost of New Common Stock = 15.00%