Toombes, Inc is issuing new common stock at a market price of $55. Dividends last year were $3.30 per share
and are expected to grow at a rate of 6%. Flotation costs will be 5% of the market price.
What is Toombes' cost of
retained earnings, and new equity, respectively?
D1 = $3.30 × 1.06 = $3.50
Cost of retained earnings = $3.50/$55 + .06 = 12.36%
Cost of new equity = $3.50/($55 x .
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