P9-10 (similar to)

Cost of common stock equity Ross Textiles wishes to measure its cost of common stock equity. The firm's stock is currently selling for

$62.68.

The firm just recently paid a dividend of

$4.14.

The firm has been increasing dividends regularly. Five years ago, the dividend was just

$3.04.

After underpricing and flotation costs, the firm expects to net

$58.92

per share on a new issue.

a.Determine average annual dividend growth rate over the past 5 years. Using that growth rate, what dividend would you expect the company to pay next year?

b.

Determine the net proceeds,

Nn,

that the firm will actually receive.c.Using the constant-growth valuation model, determine the required return on the company's stock,

rs,

which should equal the cost of retained earnings,

rr.

d.Using the constant-growth valuation model, determine the cost of new common stock,

rn.