Question

Barton industries expects next year's annual dividend, d1, to be $1.80 and it expects dividends to grow at a constant rate

Answer 1

Answer:

Next year's annual dividend, D1 = $1.90

Constant Dividend Growth, g = 4.2% = 0.042

Current common stock price, P0 = $23.00

Flotation Cost, F = 4.3% = 0.043

We know that Cost of new common equity, Re = D1 / [P0 * (1-F)] + g

Re = 1.90 / [23*(1-.043)] + 0.042

= 1.90 / 22.011 + 0.042

= 0.0863 + 0.042 = 0.1283 = 12.83%

So, flotation adjustment = 12.83% - (cost of equity calculated without the flotation adjustment)

= 12.83% - 12% = 0.83%

So, cost of new common equity = Old common equity cost + floatation adjustment = 11.5% + 0.83% = 12.33%

(Three ways to determine cost of common equity:

1. CAPM, Re = Rf + beta * (Rm - Rf)

2. Re = D1/P0 + g

3. Re = Bond yield + Risk premium )

Answer 2

Explanation:

Barton Industries Expects Next Year's Annual Dividend, D1, To Be $1.90 And It Expects Dividends To Grow At A Constant Rate G = 4.2%. The Firm's Current Common Stock Price, P0, Is $23.00. If It Needs To Issue New Common Stock, The Firm Will Encounter A 5.9% Flotation Cost, F