Question

Trahan Lumber Company hired you to help estimate its cost of common equity. You obtained the following data: D1 = $1.25; P0 = $27.50; g = 5.00% (constant); and F = 6.00%. What is the cost of equity raised by selling new common stock? Select one: a. 9.06% b. 9.44% c. 9.84% d. 10.23% e. 10.64%

Answer 1

Answer:

cost of equity raised by selling new common stock = 9.84%

so correct option is c. 9.84%

Explanation:

given data

D1 = $1.25

Po = $27.50

g = 5.00%

F = 6.00%

to find out

cost of equity raised by selling new common stock

solution

we will apply here cost of equity raised by selling new common stock formula that is express as

cost of equity raised  = $\frac{D1}{Po-F*Po}$  + g   ..................1

put here value we get

cost of equity raised  = $\frac{D1}{Po-F*Po}$  +g

cost of equity raised  = $\frac{1.25}{27.50-0.06*27.50}$  + 5%

solve we get

cost of equity raised by selling new common stock = 9.84%

so correct option is c. 9.84%