Homework Answers
1)
Cost of retained earnings = (D1 / share price) + growth rate
Cost of retained earnings = [(1.9 * 1.07) / 36] + 0.07
Cost of retained earnings = 0.05647 + 0.07
Cost of retained earnings = 0.1265 or 12.65%
2)
Flotation cost = 0.08 * 36 = 2.88
Price after flotation cost = 36 - 2.88 = 33.12
Cost of new common stock = (D1 / share price) + growth rate
Cost of new common stock = [(1.9 * 1.07) / 33.12] + 0.07
Cost of new common stock = 0.06138 + 0.07
Cost of new common stock = 0.1314 or 13.14%
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