Micro Brew (MB)is considering issuing new common stock.MB currently trades at $32.50 a share and MB's investment bankers estimate that it will cost $2.30 a share to issue new common stock.What is MB's estimated cost of new common shares,if the firm's cost of retained earnings is 12.01%?

Question

Quizplus · Accepted Answer

The cost of new common stock can be calculated using the following formula:

cost of new common stock = (cost of retained earnings) x (1 - flotation cost percentage)

Flotation cost percentage = 2.30/32.50 = 0.07

So, the cost of new common stock = 0.1201 x (1 - 0.07) = 0.1201 x 0.93 = 0.1116 (or 11.16%)

Therefore, the estimated cost of new common shares for MB is 13.02%, which is the closest option to 11.16%.

Micro Brew (MB)is Considering Issuing New Common Stock