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slavikrds [6]
3 years ago
9

Suppose that Tan Lines' common shares sell for $20 per share, are expected to set their next annual dividend at $1.00 per share,

and that all future dividends are expected to grow by 5 percent per year, indefinitely. If Tan Lines faces a flotation cost of 10 percent on new equity issues, what will be the flotation-adjusted cost of equity
Business
1 answer:
Verizon [17]3 years ago
3 0

Answer:

Cost of equity = 10.6%

Explanation:

<em>According to the dividend valuation, the value of a stock is the present value of expected future dividends discounted at the required rate of return.</em>

<em>The model can me modified to determined the cost of equity having flotation cost as follows:</em>

Cost of equity = D(1+r )/P(1-f) + g

d- dividend, p- price of stock , f - flotation cost , - g- growth rate in dividend

D-1.00, p - 20, f- 10%, g- 5%

Applying this to the question;

cost of equity - 1.00/(20×(1-0.1) )+ 0.05

= 10.6%

Cost of equity = 10.6%

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