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user100 [1]
3 years ago
6

Myers Corporation's stock currently trades at $40 a share. Investors estimate that the year-end dividend will be $2.00 a share a

nd that its dividend will grow at 5% a year (i.e., D1= $2.00 and g = 5%). The company needs to issue new stock in order to fund its upcoming projects, and investment bankers estimate that the floatation cost will be 4%. What is Myers' cost of new external equity?
a) 10.2%
b) 12.0%
c) 9.6%
d) 11.3%
e) 8.5%
Business
1 answer:
Fofino [41]3 years ago
4 0

Answer: 10.2%

Explanation:

The formula to solve this question will be: Re =D1/P0(1 - float) + g

where,

D1 = $2.00

P0 = $40

Float = 4% = 4/100 = 0.04

g = 5% = 5/100 = 0.05

We will then solve Myers' cost of new external equity by slotting the values into the formula written. This will now be:

Re =D1/P0(1 - float) + g

= 2/40(1 - 0.04) + 0.05

= 2/(40 × 0.96) + 0.05

= 2/38.4 + 0.05

= 0.052 + 0.05

= 0.1020

= 10.2%

Myers' cost of new external equity will be 10.2%

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Word-of-mouth marketing (WOM) is an age old marketing technique that has stood the test of time to remain the most effective form of marketing. It is a powerful asset in our line of work which retains its influential power on the purchase behaviour of customers because it is based on trust, piques people's interestand and gets people talking.  

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