Chapter 11, Problem 9PROB

Summary Introduction

Cost of retained earnings:

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:

$\text{Cost retained earnings}=\frac{\text{Expected dividend}}{\text{Current price}}$

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:

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

CE has current price is $50 and expected dividend of $6. Flotation cost for issuing the new common stock is 7%.