Question

A company stock currently sells for 75$ per share. The firms plans to pay cash dividends of 4$ per share next year. The growth rate of dividends is 3%. New stock (external equity) can be sold to net 66$ per share.

A) what is the company cost of retained earnings?
B) what is the company percentage floatation cost?
C) What is the company's cost of new common stock?

Answer 1

The company's cost of retained earnings is 5.33%, the company's percentage flotation cost is 12%, and the company's cost of new common stock is 12%.

Step-by-step explanation:

A) The company's cost of retained earnings can be calculated using the dividend growth model. The formula is:

Cost of Retained Earnings = (Dividends per Share / Current Stock Price) + Growth Rate

Using the given information:

Cost of Retained Earnings = ($4 / $75) + 0.03

Cost of Retained Earnings = 0.0533 or 5.33%

B) The company's percentage flotation cost can be calculated as the difference between the selling price per share and the net amount received per share:

Percentage Floatation Cost = (Selling Price per Share - Net Amount Received per Share) / Selling Price per Share

Using the given information:

Percentage Floatation Cost = ($75 - $66) / $75

Percentage Floatation Cost = 0.12 or 12%

C) The company's cost of new common stock is the same as the percentage floatation cost:

Cost of New Common Stock = Percentage Floatation Cost = 12%