The difference between the flotation-adjusted cost of equity and the cost of equity calculated without the flotation adjustment represents the flotation cost adjustment.
Quantitative Problem: Barton Industries expects next year's annual dividend, D1, to be $1.50 and it expects dividends to grow at a constant rate gL = 4%. The firm's current common stock price, P0, is $23.70. If it needs to issue new common stock, the firm will encounter a 5.3% flotation cost, F. Assume that the cost of equity calculated without the flotation adjustment is 12% and the cost of old common equity is 11.5%. What is the flotation cost adjustment that must be added to its cost of retained earnings? Round your answer to 2 decimal places. Do not round intermediate calculations.
%
What is the cost of new common equity? Round your answer to 2 decimal places. Do not round intermediate calculations.
%