Question

Uber plans to sell shares of common stock to raise capital funds. They estimate that each share of common stock will sell for $181, but their investment bank will charge a 4% fee. The face value is $181 per share. Uber also plans to pay a dividend each year of 10% while maintaining an annual growth rate of 7% to keep their shareholders happy. What is Uber's cost of capital of this common stock?

Answer 1

Answer:

18.11%

Explanation:

Data provided in the question:

Selling price = $181

Fees charged = 4% = 0.04

Face value = $181 per share

Dividend paid each year = 10% = 0.10

Annual growth rate = 7% = 0.07

Now,

Uber's cost of capital of this common stock

= [ D1 ÷ (Face value - D1)] + Growth rate

= [ ( $181 × 0.1) ÷ ($181 - 181 × 0.1)] + 0.07

= [ 18.1 ÷ 162.9 ] + 0.07

= 0.1811

or

= 0.1811 × 100% = 18.11%