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If a firm plans to issue new stock, flotation costs (irvestment bankers' fees) should not be ignored. There are two approaches to use to account
If a firm plans to issue new stock, flotation costs (irvestment bankers' fees) should not be ignored. There are two approaches to use to account for flotation costs. The first approach is to add the sum of notation costs for the debt, preferred, and common stock and add them to the intial investment cost. Because the investment cost is increased, the project's expected rate of return is reduced so it may not meet the firm's hurdie rate for accaptance of the project. The second approach imvolves adjusting the cost of common equity as follows: Cost of equity from new stock =Fe=PV(tF)D1+g The difference between the flotation-adjusted cost of equity and the cost of equity calculated wathout the fictation adjustment represents the flotation cost adjustment. Quantitative Problems Barton Industries expects next year's annual dividend, D2, to be $2.30 and it expects dividends to grow at a constant rate g=4.7%. The firm's current common stock price, P0, is $25.00. If it needs to issue new common stock, the firm will encounter a 5.3% flotation cost, F. What is the fotation cost adjustment that must be added to its cost of retained earnings? Do not round intermediate calculations: Round your answer to two decimal places. What is the cost of pew common equity considering the estimate made from the three estimation metrodologies? Do not round intermedsate caliculations. Alound vour answer to two decimal places
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