COST OF COMMON EQUITY WITH AND WITHOUT FLOTATION The Evanec Company\'s next expe

Question

COST OF COMMON EQUITY WITH AND WITHOUT FLOTATION

The Evanec Company's next expected dividend, D1, is $3.35; its growth rate is 4%; and its common stock now sells for $40. New stock (external equity) can be sold to net $36.00 per share.

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

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

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

Explanation / Answer

1.cost of retained earnings=(D1/P0)+Growth rate

=(3.35/40)+0.04=12.38%(Approx)

2.% floatation cost=(40-36)/40=10%

3. cost of new common stock=(D1/P0(1-floatation cost))+growth rate

=(3.35/36)+0.04=13.31%(Approx)

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