3. Retained earnings versus new common stock Using the data for a firm shown in the following table, calculate the cost of retained earnings and the cost of new common stock using the constant-growth valuation model. (Click on the icon located on the top-right corner of the data table below in order to copy its contents into a spreadsheet.)

Projected

Current market Dividend dividend perUnderpricing Flotation cost

price per sharegrowth rateshare next yearper shareper share

$37.009% $1.85 $1.00 $2.00

a. The cost of retained earnings is ___%. (Round to two decimal places.)

4. WACCBook weights and market weightsWebster Company has compiled the information shown in the following table:

Source of Capital Book valueMarket valueAfter-tax cost

Long-term debt $4,000,000$3,840,0008%

Preferred stock 40,000 62,00011%

Common stock equity 1,060,0004,812,00015%

Totals $5,100,000 $8,714,000

a. Calculate the weighted average cost of capital using book value weights.

b. Calculate the weighted average cost of capital using market value weights.

c. Compare the answers obtained in parts a and b. Explain the differences.