Question

7. Problem 10.07 Click here to read the eBook: The Cost of Retained Earnings, rs Click here to read the eBook: Cost of New Common Stock, le COST OF COMMON EQUITY WITH AND WITHOUT FLOTATION The Evanec Company's next expected dividend, D1, is $2.50; its growth rate is 5%; and its common stock now sells for $32. New stock (external equity) can be sold to net $30.40 per share. a. What is Evanec's cost of retained earnings, rs? Round your answer to two decimal places. Do not round your intermediate calculations. b. What is Evanec's percentage flotation cost, F? Round your answer to two decimal places. F= c. What is Evanec's cost of new common stock, re? Round your answer to two decimal places. Do not round your intermediate calculations. Grade It Now Save & Continue Continue without saving

Answer 1

a)

Cost of retained earnings (r) D1 PO+g Here, Net stock price (PO) Expected dividend (D1) Growth rate (g) $ 32.00 $ 2.50 5% Cost of retained earnings (r) 12.81% 2.5 32+5%

b)

Flotation cost:

= ($32-$30.40)/$32

= 5.00%

Hence, Flotation cost is 5.00%

c)

D1 [POx(1-F)+g Cost of new common stock Here, Stock price (PO) $ 32 $ Expected dividend (D1) 2.50 Flotation cost (F) 5.00% Growth rate (g) 5% 13.22% Cost of new common stock 2.5/(32x(1-5%))+5%

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