Question

The Evanec Company's next expected dividend, D1, is $3.03; its growth rate is 5%; and its common stock now sells for $34.00. New stock (external equity) can be sold to net $28.90 per share.
a. What is Evanec's cost of retained earnings?
b. What is Evanec's percentage flotation cost?
c. What is Evanec's cost of new common stock?

Answer 1

Answer:

(a) 14%

(b) 15%

(c) 15.48%

Explanation:

cost of retained earnings:

= ($3.03 ÷ $34) + 0.05

= 0.09 + 0.05

= 14%

Therefore, the Evanec's cost of retained earnings is 14%

Flotation cost percentage:

= [($34 - $28.90) ÷ $34] × 100

= 0.15 × 100

= 15%

Therefore, the Evanec's percentage flotation cost is 15%.

Cost of new common stock:

= ($3.03 ÷ $28.90) + 0.05

= 0.1048 + 0.05

= 15.48%

Therefore, the Evanec's cost of new common stock is 15.48%.