1.       The Evanec Company’s next expected dividend, D1, is $3.18; its growth rate is 6% and the stock now sells for $36. New stock can be sold to net the firm $32.40 per share.


  What is Evanec’s cost of new common stock, Ke?

To calculate Evanec's cost of new common stock ($K_e$), we can use the Gordon Growth Model (also known as the Dividend Discount Model). The formula for the cost of new common stock considering flotation costs is:

\[
K_e = \frac{D_1}{P_0 - F} + g
\]

Where:
- $D_1$ = Expected dividend = $3.18
- $P_0$ = Current stock price = $36.00
- $F$ = Flotation cost (the difference between the current stock price and the net proceeds) = $36.00 - $32.40 = $3.60
- $g$ = Growth rate of dividends = 6% = 0.06

Plugging in the values:

\[
K_e = \frac{3.18}{36 - 3.60} + 0.06
\]

Calculating the denominator first:

\[
36 - 3.60 = 32.40
\]

Now calculating $K_e$:

\[
K_e = \frac{3.18}{32.40} + 0.06
\]

\[
K_e = 0.0981 + 0.06
\]

\[
K_e = 0.1581 \text{ or } 15.81\%
\]

So, Evanec’s cost of new common stock is **15.81%**.

Would you like any details or have any questions? Here are some relative questions for further exploration:

1. How does flotation cost affect the cost of new common stock?
2. What would be the impact on $K_e$ if the growth rate increased to 7%?
3. How does the cost of new common stock compare to the cost of retained earnings?
4. Can the Gordon Growth Model be used if the growth rate is higher than the required rate of return?
5. How is the cost of equity different from the cost of debt for a company?

**Tip:** When using the Gordon Growth Model, make sure the growth rate of dividends is realistic and sustainable; otherwise, the calculated cost of equity may not be reliable.

The Evanec Company’s next expected dividend, D1, is $3.18; its growth rate is 6% and the stock now sells for $36. New stock can be sold to net the firm $32.40 per share. What is Evanec’s cost of new common stock, Ke?

Learn how to calculate Evanec's cost of new common stock using the Dividend Discount Model (Gordon Growth Model). The stock's next dividend is $3.18, the growth rate is 6%, and the net proceeds per share are $32.40. This solution shows a step-by-step breakdown of the formula Ke = D1 / (P0 - F) + g and explains the financial concepts behind it.

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