Question

Jiffy Co. expects to pay a dividend of​ $3.00 per share in one year. The current price of Jiffy common stock is​ $60 per share. Flotation costs are​ $3.00 per share when Jiffy issues new stock. What is the cost of internal common equity​ (retained earnings) if the longminusterm growth in dividends is projected to be 8 percent​ indefinitely

Answer 1

Answer:

B13%, explained below:

Explanation:

Flotaion cost doesn't impact the cost of existing equity and it only impact the cost of new equity. The question asks about cost of existing equity, hence

Cost of equity ={ Expected dividend in one year/ Stock price} + growth rate = 3 /60% + 8%

Cost of existing equity (Retained earnings) = 13%