Question

Barton Industries expects next year's annual dividend, D1, to be $2.30 and it expects dividends to grow at a constant rate gL = 5%. The firm's current common stock price, P0, is $23.50. If it needs to issue new common stock, the firm will encounter a 4.6% flotation cost, F. 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.

Answer 1

Cost of equity with flotation cost = (Next year’s dividend /(Price of stock*(1-Flotation cost))) + growth rate

Cost of equity with flotation cost = (D1/(P0*(1-F)))+ g

Cost of equity with flotation cost = (2.30/(23.50*(1-4.6%)))+5%

Cost of equity with flotation cost = 15.259155%

Cost of equity with flotation cost = 15.26%

Note: As we have limited information, providing a note below;

Flotation cost adjustment = Cost of equity with flotation cost – Cost of equity without flotation cost

Flotation cost adjustment = 15.259155%– ((D1/(P0))+g)

Flotation cost adjustment = 15.259155% - ((2.30/(23.50))+5%)

Flotation cost adjustment = 0.47%