Question

Common equity investors of Adventure Outfitter Corp. require a 18.4% return. The flotation costs of selling the stock amount to 4.9% of the selling price. The dividends are expected to grow at the 4.7% annual rate forever. Find the cost of new equity for the company, in %, to the nearest 0.01% (drop the % symbol when recording the answer).

Note: Use the alternative formula for finding the cost of new equity (on the instructor's handout; the formula in the text is incorrect).

Answer 1

Information given in the question: Required retum = 18.4% Floation cost of selling stock 4.94, of selling price. Dividends Expected to at 4.7 to grow let as assume selling price of stock =$100 selling price of Stock (Po) = Dividend pershare Required Retum. - growth sate $100 = Divedend peshare 0-1840. o.ou7 100x 13.7%. • Dividend pershave = (DPS) - $13.70]

cost of new tauity = Dividend pershare D.P.S.) 2 Net proceeds growth rate net proceeds = Cement Stock price - Floation cost $100 - ($100x 4.9.7.) $95-10) cost of new tamty (ke) $13.70 to our $95.10 0.144 os+ 0.047 M = 0.19108 Cost of new tauity = 19.104.)