Question

7. Problem 10.07 (Cost of Common Equity with and thout Flotation) eBook The Evanec Company's next expected dividend, Di, is $2.64; its growth rate is 6%; and its common stock now sells for $39.00. New stock (external equity) can be sold to net $35.10 per share. a. What is Evanec's cost of retained earnings, rs? Do not round jntermediate calculations. Round your answer to two decimal places. rs b. What is Evanec's percentage flotation cost, F7 Round your answer to two decimal places F c. What is Evanec's cost of new common stock, re? Do not round intermediate calculations. Round your answer to two decimal places. fe %

Answer 1

a. Cost of retained earnings is computed as shown below:

= D1 / P0 + g

= $ 2.64 / $ 39 + 0.06

= 12.77% Approximately

b. Percentage flotation cost is computed as follows:

= ( Current stock price - new stock price ) / current stock price

= ( $ 39 - $ 35.10 ) / $ 39

= 10%

c. Cost of common stock is computed as follows:

= ( d1 / po (1-F) ) + g

= ( $ 2.64 / $ 39 ( 1 - 0.10 ) + 0.06

= 13.52% Approximately

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