Quantitative Problem: Barton Industries expects next year's annual dividend, D1, to be $2.40 and it expects dividends to grow at a constant rate gL = 4.8%. The firm's current common stock price, P0, is $24.00. If it needs to issue new common stock, the firm will encounter a 5.6% flotation cost, F. Assume that the cost of equity calculated without the flotation adjustment is 14.8% and the cost of old common equity is 14.2%. 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.
%
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.
%
Details given
D1 = $ 2.40
Dg = 4.8%
P0 = 24
F = 5.6%
Cost of equity without flotation costs = 14.8%
Cost of Old common equity = 14.2%
1) Cost of new common equity
Cost of equity with flotation costs
= D1 / P0(1-F)+Dg
= 2.4 / 24(1-5.6%)+4.8%
= 2.4 / 24 (0.944)+4.8%
= 2.4 / 22.66+4.8%
=10.59%+4.8%
=15.39%
2) Flotation cost adjustment to retained earnings
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%
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