Eakins Inc.'s common stock currently sells for $45.00 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 common from retained earnings? 0.09% 0.19% 0.37% 0.56% 0.84%

Question

Semaj Welch

Business

1 July, 01:25

Eakins Inc.'s common stock currently sells for $45.00 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 common from retained earnings? 0.09% 0.19% 0.37% 0.56% 0.84%

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Lane Blake · Answer 1

0.37%

Explanation:

Since the expected payout ratio and earning per share is given, so we compute the current dividend which is shown below:

= Earning per share * payout ratio

= $2.75 * 70%

= $1.925

Now the cost of retained earning would be

= Current year dividend : price + Growth rate

= $1.925 : $45 + 0.06

= 10.28%

And, the cost of new stock would be

= Current year dividend : price * (1 - flotation cost) + Growth rate

= $1.925 : $45 * (1 - 0.08) + 0.06

= 10.65%

So, the exceed cost would be

= 10.65% - 10.28%

= 0.37%