Bike Inc. wishes to issue new stock to finance an aggressive expansion. Gyro investment bank charges...
Bike Inc. wishes to issue new stock to finance an aggressive expansion. Gyro investment bank charges a flotation cost of 0.16 as a fraction of each stock sold. Bike Inc. current stock price is 71, and it expects to pay a dividend of 0.89 at the end of the year. What is Bike Inc. component cost of a new equity issue?
Homework Answers
Cost of Floatation = F = 0.16, Current price = P0 = $ 71 and Expected Dividend = D1 = $ 0.89
Let the component cost of new equity be ke
Therefore, ke = [D1/P0 x (1-F)] = [0.89/71 x (1-0.16)] = 0.01492 or 1.492 %
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