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What is the percentage cost of new-issue common stock

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Reference no: EM132951521

Problem - You are a new employee of the Scannell Poultry Processing Company and as a part of your training, you are asked to determine the cost of equity capital (retained earnings) for the firm. You observe that the latest (2021) dividend per share is (D0 = 4.70), the stock price is $100, and the annual earnings per share have been:

EPS

2016 $7.84

2017 8.32

2018 8.83

2019 9.37

2020 9.94

2021 10.55

Also, you observe that the current 10-year U.S. treasury rate is 1.58 percent and according to Pablo Fernandez, et.al. survey, the average US stock market risk premium (stock market return less yield on 10-year US Treasuries) used by investors is 5.5 percent. The beta for Scannell is 1.733. Also, use the annual compound growth rate for EPS for the 5-year period from 2016-2021 to estimate the firm's grow rate.

Required -

A. What is your estimate for the cost of retained earnings? Use both the DCF and the CAPM models in your estimates?

B. Given a transaction (flotation) costs of 5% for newly issued common stock, what is the percentage cost of new-issue common stock for Scannell?

C. Explain why retained earnings has a cost.

Reference no: EM132951521

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