Cost of common stock equity Ross Textiles wishes to measure its cost of common stock equity. The firm’s stock is currently selling for $57.50. The firm expects to pay a $3.40 dividend at the end of the year (2016). The dividends for the past 5 years are shown in the following table. After underpricing and flotation costs, the firm expects to net $52 per share on a new issue.
Year Dividend
2015 $3.10
2014 $2.92
2013 $2.60
2012 $2.30
2011 $2.12
a. Determine the growth rate of dividends from 2011 to 2015.
b. Determine the net proceeds, Nn, that the firm will actually receive.
c. Using the constant-growth valuation model, determine the cost of retained earnings, rr.
d. Using the constant-growth valuation model, determine the cost of new common stock, rn.