Cost of Equity with and without Flotation Jarett & Sons\'s common stock currentl
ID: 2658057 • Letter: C
Question
Cost of Equity with and without Flotation
Jarett & Sons's common stock currently trades at $30.00 a share. It is expected to pay an annual dividend of $2.75 a share at the end of the year (D1 = $2.75), and the constant growth rate is 5% a year. What is the company's cost of common equity if all of its equity comes from retained earnings? Round your answer to two decimal places. Do not round your intermediate calculations. % If the company issued new stock, it would incur a 11% flotation cost. What would be the cost of equity from new stock? Round your answer to two decimal places. Do not round your intermediate calculations.
Explanation / Answer
Cost of retained earnings ( r) D1÷P0+g Here, Stock price (P0) $ 30.00 Expected dividend (D1) $ 2.75 Growth rate (g) 5.00% Cost of retained earnings ( r) 14.17% 2.75÷30+5% Cost of equity from new stock ( r) D1÷[P0×(1-F)]+g Here, Stock price (P0) $ 30.00 Expected dividend (D1) $ 2.75 Flotation cost (F) 11.00% Growth rate (g) 2.75% Cost of equity from new stock ( r) 13.05% 2.75/(30×(1-11%))+2.75%