Cost of Equity with and without Flotation Javits & Sons\' common stock currently
ID: 2733094 • Letter: C
Question
Cost of Equity with and without Flotation Javits & Sons' common stock currently trades at $33,00 a share. It is expected to pay an annual dividend of $1.00 a share at the end of the year (D_1 = $1.00), and the constant growth rate is 4% a year. a. 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. % b. If the company were to issue new stock, it would incur a 10% flotation cost. What would the cost of equity from new stock be? Round your answer to two decimal places. %Explanation / Answer
Ans: Calculation of cost of equity: 33=1/(ke-.04) 33ke-1.32=1 ke=2.32/33*100 Ke= 7.03% Ans2 Floatation cost= 10% 33(1-.10)= 1/(ke-.04) 29.7=1/(ke-.04) 29.7ke=2.188 ke=7.36%