Eakins Inc.'s common stock currently sells for $55.00 per share, the company expects to earn $2.75 per share during the current year, its expected payout ratio is 70%, and its expected constant growth rate is 6.00%. New stock can be sold to the public at the current price, but a flotation cost of 8% would be incurred. By how much would the cost of new stock exceed the cost of retained earnings?A. 0.21%B. 0.30%C. 0.37%D. 0.24%E. 0.27%

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Asked Jan 14, 2020
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Eakins Inc.'s common stock currently sells for $55.00 per share, the company expects to earn $2.75 per share during the current year, its expected payout ratio is 70%, and its expected constant growth rate is 6.00%. New stock can be sold to the public at the current price, but a flotation cost of 8% would be incurred. By how much would the cost of new stock exceed the cost of retained earnings?

A. 0.21%

B. 0.30%

C. 0.37%

D. 0.24%

E. 0.27%

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Expert Answer

Step 1

First, dividend will be computed as follows:  Payout ratio * Earning per share

                                                                      = 70 % * $2.75

                                                                      = $1.925

 

Now, cost of equity will be computed as follows:

Finance homework question answer, step 1, image 1
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Step 2

Cost of equity with floatation cost: New current market price = 55 * (1-0.08)

                                             &...

Finance homework question answer, step 2, image 1
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