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13 April, 07:58

The Evanec Company's next expected dividend, D1, is $3.03; its growth rate is 5%; and its common stock now sells for $34.00. New stock (external equity) can be sold to net $28.90 per share.

a. What is Evanec's cost of retained earnings?

b. What is Evanec's percentage flotation cost?

c. What is Evanec's cost of new common stock?

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Answers (1)
  1. 13 April, 09:08
    0
    (a) 14%

    (b) 15%

    (c) 15.48%

    Explanation:

    cost of retained earnings:

    = ($3.03 : $34) + 0.05

    = 0.09 + 0.05

    = 14%

    Therefore, the Evanec's cost of retained earnings is 14%

    Flotation cost percentage:

    = [ ($34 - $28.90) : $34] * 100

    = 0.15 * 100

    = 15%

    Therefore, the Evanec's percentage flotation cost is 15%.

    Cost of new common stock:

    = ($3.03 : $28.90) + 0.05

    = 0.1048 + 0.05

    = 15.48%

    Therefore, the Evanec's cost of new common stock is 15.48%.
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