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If a firm plans to issue new stock, flotatian costs (irivestment benkers' ' fees) should not be ignered. There are two appiroaches to use to
If a firm plans to issue new stock, flotatian costs (irivestment benkers' ' fees) should not be ignered. There are two appiroaches to use to account for flocation coats. The first aporoach is to add the sum of flotation costs tor the debt, freferred, and common stock and add them to the intial inveatment cost. Because the investment cost is increased, the project's expected rate of return is reduced so it moy nat meet the firm's hurdie rate for acceptance of the project. The second approach involves adjusting the cost of cornmon equity as Cost of equity frome new stock =rp=P1(11)Di+R The differnnce between the fotation-adjusted cort of equity and the cost of equity calculated without the fotation adyustment represents the focation cost adjustrient? Quantitative Problemi Barton Industries expects next vear's annual dividend, Dtr to be 51.70 and it expects dividends to grow at a conatant rate g=4.3%. The frm's current common stock arice, Pei is $25.00. If it needs to iswue new common stock, the firm will encounter a 4.3 s fotation coot, f. What is the fotation cost adjustment that must be adefed to its cost of retained eamings? Do not round intermediate calculations. Round your answer to two decimal places. Whist is the cost of new common equily combdering the estimate made from the three estimation mathodologles? Do not round intermediate caiculations. Round your ansemer to fro decimal ploces
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