The Evanec Company\'s next expected dividend, D1, is $3.62; its growth rate is 6
ID: 2669089 • Letter: T
Question
The Evanec Company's next expected dividend, D1, is $3.62; its growth rate is 6%; and its common stock now sells for $35. New stock (external equity) can be sold to net $33.25 per share.
a. What is Evanec's cost of retained earnings, rs? Round your answer to two decimal places.
rs =__________ %
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.
re = _______
Explanation / Answer
a. Cost of retained earnings = Dividend/Selling price of common stokc + Growth rate Here, Dividend is $3.62 Selling price is $35. Growth rate is 6% Cost of retained earnings = $3.62/$35 + 0.06 = 0.1034 + 0.06 = 0.1634 = 16.34% Therefore cost of retained earnings is 16.34% b. Flotation costs = Common stock now sell - New stock can be sold = $35 - $33.25 = $1.75 Percentate of flotation cost = Flotation cost/Selling price(Now) = $1.75/$35 = 0.05 (or) 5% Therefore percentage of flotation cost is 5.00% c. New common stock retained earingins = Dividend/Sellling price of new common stock + g = $3.62/$33.25 + 0.06 = 0.1089 + 0.06 = 0.1689 = 16.89% Therefore new common stock retained earnings is 16.89%.Related Questions
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