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Reynolds Textiles wants to measure its cost of common equity. The firm's stock is currently selling for $57.50 per share. The firm expects to pay a $3.40 dividend at the end of 2011 (so assume that D1 = $3.40 for purposes of calculation). The dividends for the last 5 years are as follows:

Year Dividend

2010 $3.10
2009 $2.92
2008 $2.60
2007 $2.30
2006 $2.12

After incurring flotation costs, Reynolds Textiles expects to net $52 per share on a new issue.

(a) Determine the growth rate of dividends (g).

(b) By applying the constant-growth valuation model, determine the cost of retained earnings common equity (rs).

(c) By applying the constant-growth valuation model, determine the cost of newly-issued common equity (re).

Basic Finance, Finance

  • Category:- Basic Finance
  • Reference No.:- M942387

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