Cost of Equity with and without Flotation Javits & Sons\' common stock currently
ID: 2776925 • Letter: C
Question
Cost of Equity with and without Flotation
Javits & Sons' common stock currently trades at $25.00 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 6% 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 8% flotation cost. What would the cost of equity from new stock be? Round your answer to two decimal places.
%
Explanation / Answer
1)
Price = recent dividend* ( 1 + growth rate )/( cost of equity - growth rate)
25 = 2.75 * /(cost of equity - 0.06)
= 17%
2)
Price * ( 1 - floatation cost) = recent dividend* ( 1 + growth rate )/( cost of equity - growth rate)
25 * (1 - 0.1) = 2.75 * /(cost of equity - 0.06)
= 18.22%