Cost of Equity with and without Flotation Javits & Sons\' common stock currently
ID: 2683179 • Letter: C
Question
Cost of Equity with and without FlotationJavits & Sons' common stock currently trades at $24.00 a share. It is expected to pay an annual dividend of $1.00 a share at the end of the year (D1 = $1.00), and the constant growth rate is 3% 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.
%
If the company were to issue new stock, it would incur a 15% flotation cost. What would the cost of equity from new stock be? Round your answer to two decimal places.
%
Explanation / Answer
cost of common equity = (1/24)+.03= 7.1667% If there is a 15% flotation cost cost of common equity = [1/{24x(1-.15)}]+.03= 7.902%