Chapter 11, Problem 10PROB

Summary Introduction

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:

$\text{Cost retained earnings}=\frac{\text{Expected dividend}}{\text{Current price}\times \left(1-\text{Flotation cost}\right)}+\text{Growth rate}$

Flotation cost is cost incurred for issuing the common stock. Examples are underwriting fee, legal fee and registration fee.

HHA has growth rate of 5% and current price is $28 and paid a recent dividend of $2.40. Cost of the new common stock is 15%.