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Cost of common stock equity

Ross Textiles wishes to measure its cost of common stock equity. The firm's stock is currently selling for $57.50. The firm expects to pay a $3.40 dividend at the end of the year (2010). The dividends for the past 5 years are shown in the following table.

Year Dividend
2009 3.10
2008 2.92
2007 2.60
2006 2.30
2005 2.12
After underpricing and flotation costs, the firm expects to net $52 per share on a new issue.
1. Determine the growth rate of dividends
2. Determine the net proceeds that the firm will actually receive
3. Using the constant growth valuation model, determine the cost of retained earnings, Rr
4. Using the constant growth valuation model, determine the cost of the new common stock, rn

Solution Preview

1. The dividends have grown from 2.12 in 2005 to 3.10 in 2009 which is 4 years. We use the compound interest formula to calculate the growth rate. The formula ...

Solution Summary

The cost of common stock equity is examined. The expert determines the net proceeds that the firm will actually receive.

$2.19