3. To raise equity funds, a firm can sell common stock for $100 per share with...
3. To raise equity funds, a firm can sell common stock for $100 per share with a 10% flotation cost. The firm paid $2.00 dividend last year. The firm’s dividends are expected to grow at an annual rate of 5%. What is the firm’s cost of equity if it sells new common stock to raise equity funds?
Homework Answers
| Cost of equity |
| As per DDM |
| Price(1-flotation %) = recent dividend* (1 + growth rate )/(cost of equity - growth rate) |
| 90*(1-0.1) = 2 * (1+0.05) / (Cost of equity - 0.05) |
| Cost of equity% = 7.33 |
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