Reference no: EM131660546

Retained earnings versus new common stock Using the data for a firm shown in the following? table, calculate the cost of retained earnings and the cost of new common stock using the? constant-growth valuation model. ?(Click on the icon located on the? top-right corner of the data table below in order to copy its contents into a? spreadsheet.)

Projected

Current market           Dividend            dividend perUnderpricing   Flotation cost

price per share           growth rateshare next yearper shareper share

$37.00                           9?%                       $1.85                    $1.00                $2.00

a. The cost of retained earnings is ___?%. (Round to two decimal? places.)

4. WACC-Book weights and market weights Webster Company has compiled the information shown in the following? table:

Source of Capital           Book value            Market value      After-tax cost

Long-term debt              $4,000,000              $3,840,000                8%

Preferred stock                     40,000                     62,000              11%

Common stock equity      1,060,000                4,812,000              15%

Totals                             $5,100,000              $8,714,000    

a. Calculate the weighted average cost of capital using book value weights.

b. Calculate the weighted average cost of capital using market value weights.

c. Compare the answers obtained in parts a and b. Explain the differences.