Question

ebook Problem Walk-Through Jarett & Sons's common stock currently trades at $27.00 a share. It is expected to pay an annual dividend of $1.25 a share at the end of the year (D = $1.25), and the constant growth rate is 8% a year 2. What is the company's cost of common equity if all of its equity comes from retained earnings? Do not round intermediate calculations. Round your answer to two decimal places. b. If the company issued new stock, it would incur a 10% flotation cost. What would be the cost of equity from new stock? Do not round intermediate calculations. Round your answer to two decimal places

Answer 1

Answer “a” – Cost of common equity = [Dividend/Share price]+ growth rate

Dividend = 1.25

Share price = 27

Growth rate = 0.08

Cost of common equity = [1.25/27]+0.08 = 0.1263

Cost of common equity = 12.63%

Answer “b” – Cost of common equity = [Dividend/ (Share price*{1-floatation cost})]+ growth rate

Dividend = 1.25

Share price = 27

Growth rate = 0.08

Floatation cost = 10%=0.10

Cost of common equity = [1.25/ (27*{1-0.10})] +0.08

Cost of common equity =[1.25/24.30] +0.08 = 0.1314 = 13.14%

Cost of common equity= 13.14%