plans to stock, invest approaches to use to account for flotation costs. The first approach is to add the sum of flotation costs for the debt, preferred, and common stock and add them to the initial investment cost. Because the investment cost is increased, the project's expected rate of return is reduced so it may not meet the firm's hurdle rate for acceptance of the project. The second approach involves adjusting the cost of common equity as follows: Cost of equity from new stock = r, = Po(l-F) +8 The difference between the flotation-adjusted cost of equity and the cost of equity calculated without the flotation adjustment represents the flotation cost adjustment. Quantitative Problem: Barton Industries expects next year's annual dividend, D1, to be $1.90 and it expects dividends to grow at a constant rate g = 4.3%. The firm's current common stock price, Po, is $25.00. If it needs to issue new common stock, the firm will encounter a 5.9% flotation cost, F. What is the flotation cost adjustment that must be added to its cost of retained earnings? Do not round intermediate calculations. Round your answer to two decimal places. % What is the cost of new common equity considering the estimate made from the three estimation methodologies? Do not round intermediate calculations. Round your answer to two decimal places.
plans to stock, invest approaches to use to account for flotation costs. The first approach is to add the sum of flotation costs for the debt, preferred, and common stock and add them to the initial investment cost. Because the investment cost is increased, the project's expected rate of return is reduced so it may not meet the firm's hurdle rate for acceptance of the project. The second approach involves adjusting the cost of common equity as follows: Cost of equity from new stock = r, = Po(l-F) +8 The difference between the flotation-adjusted cost of equity and the cost of equity calculated without the flotation adjustment represents the flotation cost adjustment. Quantitative Problem: Barton Industries expects next year's annual dividend, D1, to be $1.90 and it expects dividends to grow at a constant rate g = 4.3%. The firm's current common stock price, Po, is $25.00. If it needs to issue new common stock, the firm will encounter a 5.9% flotation cost, F. What is the flotation cost adjustment that must be added to its cost of retained earnings? Do not round intermediate calculations. Round your answer to two decimal places. % What is the cost of new common equity considering the estimate made from the three estimation methodologies? Do not round intermediate calculations. Round your answer to two decimal places.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:If a firm plans to issue new stock, flotation costs (investment bankers' fees) should not be ignored. There are two approaches
to use to account for flotation costs. The first approach is to add the sum of flotation costs for the debt, preferred, and
common stock and add them to the initial investment cost. Because the investment cost is increased, the project's expected
rate of return is reduced so it may not meet the firm's hurdle rate for acceptance of the project. The second approach
involves adjusting the cost of common equity as follows:
Cost of equity from new stock = r,
D1
+8
Po(1-F)
The difference between the flotation-adjusted cost of equity and the cost of equity calculated without the flotation adjustment
represents the flotation cost adjustment.
Quantitative Problem: Barton Industries expects next year's annual dividend, D1, to be $1.90 and it expects dividends to
grow at a constant rate g = 4.3%. The firm's current common stock price, Po, is $25.00. If it needs to issue new common
stock, the firm will encounter a 5.9% flotation cost, F. What is the flotation cost adjustment that must be added to its cost of
retained earnings? Do not round intermediate calculations. Round your answer to two decimal places.
%
What is the cost of new common equity considering the estimate made from the three estimation methodologies? Do not
round intermediate calculations. Round your answer to two decimal places.
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