P10-13 Cost of common equity with flotation: Ballack Co.\'s commonstock currentl
ID: 2661818 • Letter: P
Question
P10-13 Cost of common equity with flotation: Ballack Co.'s commonstock currently sells for $46.75 per share. The growth rate is aconstatn 12%, and the company has an expected dividend yield of 5%.The expected long run dividend payout ratio is 25%, and theexpected return on equity (ROE) is 16%. New stock can ve sold tothe public at the current price, but a flotation cost of 5% wouldbe incurred . What would the cost of new equity be? 10-16 Cost of common equity: The Bouchard Company's EPS was %6.50 in2005, up from $4.42 in 2000. The company pays out 40% of itsearnings as dividends, and its common stock sells for $36. A. Calculate the past growth rate in earnings. (Hint: This isa 5 year growth period.) B. The last dividend was Do=0.4($6.50)=$2.60. Calculate thenext expectedc dividend, D1, assuming that the past groth rate continues. C. What is Bouchards cost of retained earnings? P10-13 Cost of common equity with flotation: Ballack Co.'s commonstock currently sells for $46.75 per share. The growth rate is aconstatn 12%, and the company has an expected dividend yield of 5%.The expected long run dividend payout ratio is 25%, and theexpected return on equity (ROE) is 16%. New stock can ve sold tothe public at the current price, but a flotation cost of 5% wouldbe incurred . What would the cost of new equity be? 10-16 Cost of common equity: The Bouchard Company's EPS was %6.50 in2005, up from $4.42 in 2000. The company pays out 40% of itsearnings as dividends, and its common stock sells for $36. A. Calculate the past growth rate in earnings. (Hint: This isa 5 year growth period.) B. The last dividend was Do=0.4($6.50)=$2.60. Calculate thenext expectedc dividend, D1, assuming that the past groth rate continues. C. What is Bouchards cost of retained earnings? C. What is Bouchards cost of retained earnings?Explanation / Answer
[10-13] You can look at this website/finance-answers-5-484115-cpi0.aspx. [10-16] (a) 2004 2000 EPS = 6.5 4.42 DPS (40%) = 2.6 1.768 Calculation of growth rate: PV = -1.768 FV = 2.6 NPER = 5 Growth rate =? Solve for rate Rate = 8% (b) D0 = 2.60 D1 = 2.60 (1 + 0.08) =2.808 (c) Cost of retained earnings rs = D1/ P0 + g rs = (2.808/36) +0.08 rs = 0.158 or 15.8%
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