The Evanec Company\'s next expected dividend, D1, is $3.41; its growth rate is 7

Question

The Evanec Company's next expected dividend, D1, is $3.41; its growth rate is 7%; and its common stock now sells for $40. New stock (external equity) can be sold to net $34.00 per share.

A. What is Evanec's cost of retained earnings, rs? Round your answer to two decimal places. Do not round your intermediate calculations.

B. What is Evanec's percentage flotation cost, F? Round your answer to two decimal places.

C. What is Evanec's cost of new common stock, re? Round your answer to two decimal places. Do not round your intermediate calculations.

Explanation / Answer

a.cost of retained earnings=(Dividend for next period/Current price)+Growth rate

=(3.41/40)+0.07

=15.53%

b.% floatation cost=(40-34)/40=15%

c.Cost of new common stock=(Dividend for next period/Current price(1-floatation costs)+Growth rate

=3.41/34+0.07

=17.03%

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