dule 5 Homework Check My Work 3 remaining o Click here to re

dule 5 Homework Check My Work (3 remaining) o Click here to read the eBook: The Cost of Retained Earnings, Click here to read the eBook: Cost of New Common Stock, re 5. Problem Walk-Through COST OF EQUITY WITH AND WITHOUT FLOTATION arett & Sons\'s common stock currently trades at $25.00 a share. It is expected to pay an annual dividend of $2.00 a share at the end of the year (D $2.00), and the constant growth rate is 8% a year. a. What is the company\'s cost of common equity if all of its equity comes from retained earnings? Round your answer to two decimal places. Do not round your intermediate 10. 12. C b. If the company issued new stock, it would incur a 18% flotation cost, what would be 13. the cost of equity from new stock? Round your answer to two decimal places. Do not round your intermediate calculations. o 14. 15. 16. Check My Work (3 remaining) 18. 19 e Question 4 of 20 Problem 10.04 Save Submit for Grading esc F5 F2

Solution

(a) Current Stock Price = P0 = $ 25, Expected Dividend = D1 = $ 2 and Constant Growth Rate = g = 8 %

Cost of Retained Earnings = Cost of Using Existing Equity = ke = (D1/P0) + g = (2/25) + 0.08 = 0.16 or 16 %

(b) Flotation Cost = F = 18 %

Cost of New Equity = ke = [D1/P0 x (1-F)] + g = [2/25 x (1-0.18)] + 0.08 = 0.1776 or 17.76 %