Ross Textile wishes to measure its cost of common stock equity. The firms stock

Question

Ross Textile wishes to measure its cost of common stock equity. The firms stock is currently selling for $57.50. The firm expects to pay a $3.40 dividend at the end of the year (2016). The dividends for the past 5 years are shown in the following table:

After underpricing and floatation costs, the firm expects to net $52 per share on a new issue.

A. determine the growth rate of dividends from 2011 to 2015.

B. determine the net proceeds, Nn, that the firm will actually receive.

C. using the constant-growth valuation model, determine the cost of retained earnings, rr,.

D. using the constant-growth valuation model, determine the cost of new common stock, r n.

YEAR Dividend 2015 $3.10 2014 $2.92 2013 $2.60 2012 $2.30 2011 $2.12

Explanation / Answer

Ans)

A. Determine the growth rate of dividends from 2011-2015

N=4 (2011-2015) PV (initial value) = -$2.12 FV (terminal value) = $3.10

B) Nn = $52 (given in the problem)

C)using the constant-growth valuation model, determine the cost of retained earnings, rr,.

rr = (D2015) / (Po) + g= 3.4/ 57.5 + 10 = 15.91%

D)  using the constant-growth valuation model, determine the cost of new common stock, r n

rn = (D2015) / (Nn) + g= 3.4/ 52 + 10 = 16.54%

Year Growth rate(%) 2012 8.49 2013 13.05 2014 12.30 2015 6.16 Average Growth 10.00

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