Suppose that Brown-Murphies’ common shares sell for $21.00 per share, that the f
ID: 1170638 • Letter: S
Question
Suppose that Brown-Murphies’ common shares sell for $21.00 per share, that the firm is expected to set their next annual dividend at $0.63 per share, and that all future dividends are expected to grow by 4 percent per year, indefinitely. Assume Brown-Murphies faces a flotation cost of 14 percent on new equity issues.
What will be the flotation-adjusted cost of equity? (Round your answer to 2 decimal places.)
Suppose that Brown-Murphies’ common shares sell for $21.00 per share, that the firm is expected to set their next annual dividend at $0.63 per share, and that all future dividends are expected to grow by 4 percent per year, indefinitely. Assume Brown-Murphies faces a flotation cost of 14 percent on new equity issues.
Explanation / Answer
Cost of Equity = 7.49%
Next Year Dividend (D1) = $0.63 per share
Current Share Price (P0) = $21 per share
Growth Rate (g) = 4%
Flotation Cost (Fc) = 14%
Flotation-adjusted cost of equity = [ D1 / Po ( 1 – Fc ) ] + g
= [ $0.63 / $21 ( 1 – 0.14 ) ] + 0.04
= [ $0.63 / $18.06 ] + 4%
= 3.49% + 4%
= 7.49%