1) Fletcher Publishing\'s stock currently trades at $45.50 per share. At the end

Question

1) Fletcher Publishing's stock currently trades at $45.50 per share. At the end of the year, Fletcher is expected to pay an annual dividend of $4.40 per share (D1 = $4.40), and the firm's dividend is expected to grow at a constant rate of 4% per year. What is the firm's cost of retained earnings (rs)?

2) If Fletcher were to issue new common stock, the new shares could be sold at the current market price, but flotation costs would account for 10% of the proceeds. What is Fletcher's cost of new common stock (re)?

3) Fletcher has forecasted net income of $500 million and a capitial budget of $800 million for next year. Fletcher's target capital structure consists of 65% debt and 35% equity. The firm also plans to keep its dividend payout ratio fixed at 35%. What is the relevant cost of common equity to be used in calculating Fletcher's weighted average cost of capital (WACC) on the last dollar it raises?

Explanation / Answer

1. 45.5= 4.4/(Ke-.04) Ke= 13.67% g=br .04= bx.1367 retained earnings = 29.26%

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