A firm wishes to issue new shares of its stock, which already trades in the market....
A firm wishes to issue new shares of its stock, which already trades in the market. The current stock price is $23, the most recent dividend was $2 per share, and the dividend is expected to grow at a rate of 6% forever. Flotation costs for this issue are expected to be 11%. What is the required rate of return (or financing cost) in this new issue?
Note: when flotation costs are given as a percentage instead of in dollar terms, the denominator in the formula changes from (P-F) to P*(1-F).
Enter your answer as a percentage, rounded to two decimals. So, if your answer is 0.123456, enter 12.34.
Homework Answers
The required rate of return (or financing cost) in this new issue is computed as shown below:
= Recent dividend ( 1 + growth rate ) / current stock price (1 - flotation cost ) + growth rate
= $ 2 ( 1 + 0.06 ) / $ 23 ( 1 - 0.11 ) + 0.06
= 16.36% Approximately
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