As the winner of a contest, you are now cfo for the day for maguire inc. and your day's job involves raising capital for expansion. maguire's common stock currently sells for $45.00 per share, the company expects to earn $2.75 per share during the current year, its expected payout ratio is 70%, and its expected constant growth rate is 6.00%. new stock can be sold to the public at the current price, but a flotation cost of 8% would be incurred. by how much would the cost of new stock exceed the cost of common from reinvested earnings?

The cost of new stock exceed the cost of common from reinvested earnings by 0.38%

Explanation:

Hi, first we need to find the cost of the current stock, for that, we need to take into account that the dividend of this stock is EPS*(Payout Ratio), that is $2.75*0.7=$1.925. With that in mind, let´s find out what the cost of the current stock is.

So, the cost of the current stock is:

That is, 10.27%

Now, in order to find the cost of the new stock, we have to use the following formula.

So, everything should look like this.

So, the cost of the new stock is 10.65%

Since the cost of the current stock is 10.27% and the new one is 10.65%, new stock exceed the cost of the current stock by 0.38%

Best of luck.

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