A firm's current profits are $1,400,000. These profits are expected to grow indefinitely at a constant annual rate of 4 percent.
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Answer:
rs=14.68%
F=15%
re=16.56%
Explanation:
using the constant growth model:
where P0 is the current stock price
D1 is the dividend expected at the end of the 1st year
rs is cost of retained earnings.
Rearranging to make rs subject of the formula:
if Evanec issues new stock, they will only net $31.45 down from $37 per share due to floatation costs. The difference, ie $37-$31.45 = $5.55 is due to floation costs.
The percentage floatation costs (F) are
alternatively, one can recognise that and F = 15%
Cost of new common stock re is calculated as follows: