Fundamentals of Financial Manageme...

9th Edition
Eugene F. Brigham + 1 other
ISBN: 9781305635937



Fundamentals of Financial Manageme...

9th Edition
Eugene F. Brigham + 1 other
ISBN: 9781305635937
Textbook Problem

COST OF EQUITY WITH AND WITHOUT FLOTATION Jarett & Sons’s common stock currently trades at $30.00 a share. It is expected to pay an annual dividend of $1.00 a share at the end of the year [D1 = $1.00], and the constant growth rate is 4% a year.

  1. a. What is the company’s cost of common equity if all of its equity comes from retained earnings?
  2. b. If the company issued new stock, it would incur a 10% flotation cost. What would be the cost of equity from new stock?


Summary Introduction

To identify: The cost of common equity of the company if all of its equity comes from retained earnings.


Cost of Equity:

It is the cost of the company while raising finance by issuing equity. It is the earnings from the investment to the firm’s equity investors. It is the return to the stockholders investments.


Given information:

Next expected dividend is $1.

Current market price is $30.

The rate of constant growth is 4% 0r 0.04.

The formula to calculate cost of common equity is,



  • r is the cost of equity.
  • D1 is the next expected dividend.
  • P0 is the current price of the stock


Summary Introduction

To determine: The cost of equity from new stock if 10% floatation cost is incurred while issuing new stock.


Cost of New Stock:

This is the cost of issuing fresh share to raise capital. Company can raise capital by retaining its earning and by issuing the new shares. The issue of new share incurs floatation cost.

Flotation Cost:

The cost which occurs when the new shares are issued by the company is called floatation cost. It increases the cost of newly issued shares.

Still sussing out bartleby?

Check out a sample textbook solution.

See a sample solution

The Solution to Your Study Problems

Bartleby provides explanations to thousands of textbook problems written by our experts, many with advanced degrees!

Get Started

Additional Business Solutions

Find more solutions based on key concepts

Show solutions add

What is the purpose of a standard cost sheet?

Managerial Accounting: The Cornerstone of Business Decision-Making

Explain the following statement: Although the balance sheet can be thought of as a snapshot of a firms financia...

Fundamentals of Financial Management, Concise Edition (with Thomson ONE - Business School Edition, 1 term (6 months) Printed Access Card) (MindTap Course List)

What is a constraint? An internal constraint? An external constraint?

Cornerstones of Cost Management (Cornerstones Series)

When does a seller have the most leverage over a buyer?

Purchasing and Supply Chain Management