P9-10 (7e) Ross Textiles wishes to measure its cost of common stock equity. The
ID: 2769253 • Letter: P
Question
P9-10 (7e)
Ross Textiles wishes to measure its cost of common stock equity. The firm’s stock is currently selling for $57.50. The firm expects to pay a $3.40 dividend at the end of 2016. The dividends for the past four years are as follows:
Year
Dividend
2015
$3.10
2014
$2.92
2013
$2.60
2012
$2.30
2011
$2.12
After underwriting and floatation costs, the firm expects to net $52 per share on a new issue.
a. Determine the growth rate of the dividends form 2011 – 2015
b. Determine the net proceeds that the firm will receive
c. Using the Constant Growth Model, determine the cost of retained earnings.
d. Using the Constant Growth Model, determine the cost of new common stock.
Year
Dividend
2015
$3.10
2014
$2.92
2013
$2.60
2012
$2.30
2011
$2.12
Explanation / Answer
growth rate g=D2012/D2008 =3.1/2.12 =1.462
From FVIF table, the factor closest to 1.462 occurs at 10% (i.e., 1.464 for 4 years).
cost of retained earnings
rr =D2013/Po +(g) =(3.4)/(57.5)+0.1 =0.1591 or 15.91%
Nn =$52
cost of new stock
rn =D2013/Nn +g =3.4/52 +0.1 =16.54%
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