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If a firm plans to issue new stock, flotation coots (irvestment bankers' fees) should not be ignored, There are two opproaches ta use to account

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If a firm plans to issue new stock, flotation coots (irvestment bankers' fees) should not be ignored, There are two opproaches ta use to account for flotation costs. The first approach is to add the sum of flotation coste for the debt, preferied, and common btock and add them to the initial lavestment cost. Beciuse the investment cost is increased, the project's expected rate of return is reduced so it may not meet the firm's hurdle rate for accentance of the project. The secone approach involves adfusting the cost of common equity as follows: Cost of equity from new stock =Te=P0(1F)D1+g The difference between the flotation-adjusted cost of equity and the coqt of eqult calculated without the flotation odjustinent represents the flotabon cost adjustment. Quantitative Problem: Barton Industries expecto next yoar's annual dividend, Di, to be $2.00 and it expects dividends to grow it a constant rate g = 4.3%. The firm's current common stock price, Po, is $25.00. It it needs to issue new common stock, the firm will encounter a 5 , 5 "te flotation, cont, I. What is the flotation cost adjustmont thit must be added to frr cost of retained earnings? Do not round intermediate calculations. Rocund your answer to two decimial places. What is the cost of new common equity consjdering thi estimate made from the three estimotion methodologleu? Do not round intermediate cakalatiane. Rhund your answer to two decimal places

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