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Haroldson Inc. common stock is selling for $26 per share. The last dividend was $1.10, and dividends are expected to grow at

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Answer #1

Cost of equity = [D0 * (1 + g) / (Market price - flotation cost)] + g

D0 = $1.10

Price = $26

Flotation cost = $26 * 7% = $1.30

Cost of equity = [$1.10 * (1 + 0.07) / ($26 - $1.30)] + 0.07

24.70

Cost of equity = [1.177 / $24.70] + 0.07 = 0.11765

Cost of equity = 11.765%

or Cost of equity = 11.77% (rounded off to 2 decimals)

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