Question

White Lion Homebuilders has a current stock price of $22.35 per share, and is expected to pay a per-share dividend of $2.03 at the end of the year. The company’s earnings’ and dividends’ growth rate are expected to grow at the constant rate of 9.40% into the foreseeable future. If White Lion expects to incur flotation costs of 3.750% of the value of its newly-raised equity funds, then the flotation-adjusted (net) cost of its new common stock (rounded to two decimal places) should be .

Answer 1

Answer:

18.84%

Explanation:

the flotation adjusted cost of new common stock = [expected dividend / (net proceeds from stock issuance)] + expected growth rate

• expected dividend = $2.03
• net proceeds from stock issuance = $22.35 x (1 - flotation costs) = $22.35 x 0.9625 = $21.5119
• expected growth rate = 9.4%

the flotation adjusted cost of new common stock = [$2.03 / $21.5119] + 9.4% = 9.44% + 9.4% = 18.84%