The Evanec Company's next expected dividend, D1, is $3.18; its growth rate is 6%; and its common stock now sells for $36. New stock (external equity) can be sold tonet $32.40 a share.
What is Evanec's percentage flotation cost, F?
a.Cost of retained earnings = (D1/Current price)+Growth rate
=($3.18 / $36 )+0.06
= 0.0883+ 0.06
= 0.1483
=14.83%
b.% flotation cost= (Current price - Net price)/Current price
=(36 – 32.40)/ 36
=10%
c. Cost of new common stock= (D1/Net price) + Growth rate
(3.18/32.40) + 0.06
= 0.0981 + 0.06
= 0.1581
=15.81 %
The percentage flotation cost (F) can be calculated using the following formula:
F = (P0 - N) / P0
Where: P0 is the current stock price N is the net proceeds per share from the new stock issuance
Given: P0 = $36 N = $32.40
Substituting the values into the formula:
F = ($36 - $32.40) / $36 F = $3.60 / $36 F = 0.1
To express the flotation cost as a percentage, we multiply by 100:
F = 0.1 * 100 F = 10%
Therefore, Evanec's percentage flotation cost (F) is 10%.
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