5. 5: The Cost of Capital: Cost of New Common Stock Quantitative Problem: Barton Industries expects next...

5. 5: The Cost of Capital: Cost of New Common Stock

Quantitative Problem: Barton Industries expects next year's annual dividend, D₁, to be $2.20 and it expects dividends to grow at a constant rate g = 5%. The firm's current common stock price, P₀, is $25.00. If it needs to issue new common stock, the firm will encounter a 5.7% flotation cost, F. What is the flotation cost adjustment that must be added to its cost of retained earnings? Do not round intermediate calculations. Round your answer to two decimal places.

What is the cost of new common equity considering the estimate made from the three estimation methodologies? Do not round intermediate calculations. Round your answer to two decimal places.

Solutions

Expert Solution

What is the flotation cost adjustment that must be added to its cost of retained earnings?

flotation cost adjustment = Cost of New Common Stock - Cost of retained earnings

flotation cost adjustment = 14.33% - 13.80%

flotation cost adjustment = 0.53%
What is the cost of new common equity considering the estimate made from the three estimation methodologies?

cost of new common equity = 14.33%

Please upvote if satisfied

jeff jeffy answered 1 year ago

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