The common stock for the Bestsold Corporation sells for $58. If a new issue is s
ID: 2625267 • Letter: T
Question
The common stock for the Bestsold Corporation sells for $58. If a new issue is sold, the flotation costs are estimated to be 8 percent. The company pays 50 percent of its earnings in dividends, and a $4 dividend was recently paid. Earnings per share 5 years ago were $5. Earnings are expected to continue to grow at the same annual rate in the future as during the past 5 years. The firms marginal tax rate is 34 percent. Calculate the cost of (a) internal common equity and (b) external common equity. Please show your work.
Explanation / Answer
RATE function in excel =RATE(NPER,PMT,PV,-FV)
=RATE(5,0,2.5,-4) = 9.86%
Five year ago dividend would be 5 x 50% = 2.5 , current dividend is 4 so putting these value in rate function we can get growth rate of 9.86%
We can also solve is by following
FV = PV*(1+r)^NPER
4 = 2.5*(1+r)^5
Solving for r = .0986 or 9.86%