Eakins Inc.'s common stock currently sells for $15.00 per share, the company expects to earn $2.75 per share during the current year, its expected payout ratio is 70%, and its expected constant growth rate is 6.00%. New stock can be sold to the public at the current price, but a flotation cost of 8% would be incurred. By how much would the cost of new stock exceed the cost of retained earnings

1.12%

Explanation:

By how much would the cost of new stock exceed the cost of retained earnings = Cost of new equity - Cost of retained earnings

Cost of retained earnings = ((2.75 * 70%) / 15) + 6.00%  

Cost of retained earnings = ((2.75 * 0.7) / 15) + 0.06

Cost of retained earnings = 0.1283 + 0.06

Cost of retained earnings =0.1883

Cost of retained earnings = 18.83%

Cost of new equity= ((2.75 * 70%) / (15 * (1 - 8%) ) + 6.00%

Cost of new equity= 19.95%

Hence, Cost of new equity - Cost of retained earnings

= 19.95% - 18.83%

= 1.12%

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