Question

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.

_____%

1b

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

Floatation cost adjustment = cost of equity with floatation cost - cost of equity without floatation cost

cost of equity floatation cost= D1 / P0(1-F)+g

cost of equity floatation cost =[2.3/25*(1-4.5%)] +4.9% =14.53%

cost of equity without floatation cost= [2.3/25] +4.9% = 14.1%

floatation cost adjustment= 14.53-14.1 =.43%

Flotation adjustment is the difference between cost new equity including Flotation costs less Cost of equity without flotation costs

= 15.39%-14.8%

= 0.59%

Q1: cost of new common equity= 14.53%

Q2: floatation cost adjustment= .43%