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CFIN
5th Edition
ISBN: 9781305661639
Author: Scott Besley, Eugene Brigham
Publisher: Cengage Learning
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Chapter 11, Problem 8PROB
Summary Introduction
Cost of
Cost incurred by the company by using retained earnings, instead of declaring dividend to common stock holders.
Calculate the cost of retained earnings as follows:
Cost of new common stock is the cost incurred by the company for issue new common stock.
Calculate the cost new common stock as follows:
TTH has growth rate of 4% and current price is $34 and paid a recent dividend of 4.25. Flotation cost for issuing the new common stock is 8.5%.
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Students have asked these similar questions
Tip Top Hats (TTH) is expected to grow at a 4 percent rate for as long as it is in business. Currently the company’s common stock is selling for $34 per share. The most recent dividend paid by TTH was $4.25 per share. If new common stock is issued, TTH will incur flotation costs equal to 8.5 percent. (a) What is the company’s cost of retained earnings? (b) What is its cost of new common equity?
Tip Top Hats (TTH) is expected to grow at a 2 percent rate for as long as it is in business. Currently the company's common stock is selling for $36 per share. The most recent dividend paid by TTH was $2.00 per share. If new common stock is issued, TTH will incur flotation costs equal to 8.0 percent.
What is the company's cost of retained earnings? Round your answer to two decimal places.
%
What is its cost of new common equity? Round your answer to two decimal places.
%
A company’s common stock is currently selling at $40 per share. Its most recent dividend was $1.60, and the financial community expects that its dividend will grow at 10% per year in the foreseeable future. What is the company’s equity cost of retained earnings? If the company sells new common stock to finance new projects and most pay $2 per share in flotation costs, what is the cost of equity?
Be sure to include your work for all calculations.
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