Reynolds Textiles

Reynolds Textiles wants to measure its cost of common equity.
The firm’s stock is currently selling for $57.50 per share. The firm expects to pay a $3.40 dividend at the end of 2011 (so assume that D1 = $3.40 for purposes of calculation).
The dividends for the last 5 years are as follows: Year Dividend 2010 $3.10 2009 $2.92 2008 $2.60 2007 $2.30 2006 $2.12 After incurring flotation costs, Reynolds Textiles expects to net $52 per share on a new issue.

Year   
   
2010    3.1
2009    2.92
2008    2.6
2007    2.3
2006    2.12

(a) Determine the growth rate of dividends (g).

(b) By applying the constant-growth valuation model, determine the cost of retained earnings common equity (rs).

(c) By applying the constant-growth valuation model, determine the cost of newly-issued common equity (re).