Cost of Common Equity:

Cost of Retained Earnings, rs:

Suppose that (1) the risk-free return is 5.5%; (2) the average stock return (i.e. the market return) is 11.5%; (3) your firm stocks beta (i.e. stocks risk) is 0.8; (4) the next dividend payment will be $1; (4) the growth rate of the dividend is 6%; (5) the current market price of the stock is $25; (6) the yield of your firms long-term bond is 6.5%; and (7) the risk premium on your firms stock over your firms bond is 4%.

Given the information above, calculate the cost of retained earnings using (1) Capital Asset Pricing Model, CAPM, approach; (2) Bond-yield-plus-risk-premium approach; and (3) Discounted Cash Flow, DCF, approach.

(1) CAPM approach:

(2) Bond-yield-plus-risk-premium approach:

(3) DCF approach:

What is the range of your estimations? What is the midpoint of this range (i.e. the final estimation of the cost of retained earnings)?

Cost of New Common Stock, re:

The flotation cost of issuing new common stock, F, is 15% of the issue price. According to the previously provided information of your outstanding common stock, estimate the cost of new common stock using the DCF approach.

According to the DCF approach cost of new common stock calculated above, (1) figure out the flotation cost adjustment for new common stock; and then (2) considering the cost of retained earnings from all three approaches, adjust for this flotation cost. What is the cost of new common stock?