Question

Jarett & son's common stock currently trades at $30.00 a share. it is expected to pay an annual divident of $1.00 a share a the end of the year(d1 = 1.00) and the constant growth rate is 4% a yearA) What is the company's cost of common equity if all of its equity comes from retained earnings?B) If the company issued new stock, it would incur a 10% flotation cost. What would be the cost of equity from new stock?

Answer 1

Answer and Explanation:

The computation is shown below:

a. The company cost of capital is

Cost of equity = (D1 ÷ share price)+ Dividend growth rate

= ($1 ÷ $30) + 0.04

= 0.033 +0.04

= 0.0733 or 7.33%

Now  

b. Cost of new equity is

= (D1 ÷ share price ×  (1 - flotation cost)) + Dividend growth rate

= [$1 ÷ $30 × (1 - 0.1)] + 0.04

= ($1 ÷ $30 × 0.9) + 0.04

= 1 ÷ 27 + 0.04

= 0.037 + 0.04

= 0.07704 or 7.71%