The Mobil Appliance Company’s earnings, dividends, and stock price are expected
ID: 2716074 • Letter: T
Question
The Mobil Appliance Company’s earnings, dividends, and stock price are expected to grow at an
annual rate of 12%. Mobil’s common stock is currently traded at $18 per share. Mobil’s last cash div-
idend was $1.00, and its expected cash dividend for the end of this year is $1.12. Suppose that Mobil
wants to raise capital to finance a new project by issuing new common stock. With the new project, the
cash dividend is expected to be $1.10 at the end of the current year, and its growth rate is 10%. The
stock now sells for $18, but new common stock can be sold to net Mobil $15 per share.
What is Mobil’s cost of new common stock (ke)? Please show your work.
Explanation / Answer
Growth rate is 12%
Current price is 18$
Divedent this year is 1.12$
Now for new issue we have.
Divedend at end of 1st year is 1.1$
Growth rate 10%
New stock price is 15$
As per divedend discount model ee have D1/(ke - growth)
So ee have 15 = 1.1/(ke - 0.1)
Ke is 17.33% for new equity shares.