Question

The Evanec Company's next expected dividend, D1, is $2.65; its growth rate is 5%; and its common stock now sells for $35.00. New stock (external equity) can be sold to net $31.50 per share.

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

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? Do not round intermediate calculations. Round your answer to two decimal places.

re=___%

Answer 1

Cost of retained earnings
	Next dividend	2.65
	Required return	R
	Share price	$                             35.00
	Dividend growth rate	5%
	Share price=	Next dividend/(Required return - Growth rate)
	35=	2.65/(R- 5%)
	(R-5%)=	2.65/35
	(R-5%)=	7.57%
	R=	12.57%
Cost of new equity
	Next dividend	2.65
	Required return	R
	Share price	$                             31.50
	Dividend growth rate	5%
	Share price=	Next dividend/(Required return - Growth rate)
	31.5=	2.65/(R- 5%)
	(R-5%)=	2.65/31.55
	(R-5%)=	8.41%
	R=	13.41%
Floatation cost
	Share price	$                             35.00
	Net proceeds	$                             31.50
	Floatation cost percentage=	(35-31.5)/35
	Floatation cost percentage=	10.00%