Question

Ross Textiles wishes to measure its cost of common stock equity. The​ firm's stock is currently selling for $41.85. The firm just recently paid a dividend of $4.03. The firm has been increasing dividends regularly. Five years​ ago, the dividend was just $3.02.

After underpricing and flotation​ costs, the firm expects to net $38.08 per share on a new issue.

a. Determine average annual dividend growth rate over the past 5 years. Using that growth​ rate, what dividend would you expect the company to pay next​ year?

b. Determine the net​ proceeds, Nn​, that the firm will actually receive.

c. Using the​ constant growth valuation​ model, determine the required return on the​ company's stock, r Subscript s

​, which should equal the cost of retained​ earnings, r Subscript r

d. Using the​ constant growth valuation​ model, determine the cost of new common​ stock,

r Subscript n.

Answer 1

U20 @ Cost of retained carning & Dit g ) x 100 where, lo = Current Selling Puce (Note There is no Matation Cost in case of retained Earning Cost of retained Earning = (4.97 + 0 0594 ) x 1 41.85 = 16.14 % a Cest of new Stock , & = (D, + g) x 100 Hell, lo = net precedy = 38.08 Cost of new Stack, I = (4.27 to 0994) 100 = 17.15%