Barton Industries expects next years annual dividend D1 to b

Barton Industries expects next year\'s annual dividend, D1, to be $1.90 and it expects dividends to grow at a constant rate g = 4.6%. The firm\'s current common stock price, P0, is $23.10. If it needs to issue new common stock, the firm will encounter a 5.1% flotation cost, F. Assume that the cost of equity calculated without the flotation adjustment is 12% and the cost of old common equity is 11.5%. What is the flotation cost adjustment that must be added to its cost of retained earnings? Round your answer to 2 decimal places. Do not round intermediate calculations.

What is the cost of new common equity considering the estimate made from the three estimation methodologies? Round your answer to 2 decimal places. Do not round intermediate calculations.

Solution

Cost of New Common Equity,Re = [D1/{P0 x (1 - F)}] + g

= [$1.90/{$23.10 x (1 - 0.051)}] + 0.046

= [$1.90/$21.9219] + 0.046

= 0.08667 + 0.046 = 0.13267 or 13.267% or 13.27%

So, Flotation Adjustment = 13.267% - (cost of equity calculated without the flotation adjustment)

= 13.267% - 12% = 1.267% or 1.27%