COST OF COMMON EQUITY WITH FLOTATION Banyan Co.\'s common stock currently sells

Question

COST OF COMMON EQUITY WITH FLOTATION Banyan Co.'s common stock currently sells for $37.00 per share. The growth rate is a constant 9.8%, and the company has an expected dividend yield of 4%. The expected long-run dividend payout ratio is 30%, and the expected return on equity (ROE) is 14%. New stock can be sold to the public at the current price, but a flotation cost of 5% would be incurred. what would be the cost of new equity? Round your answer to two decimal places. Do not round your intermediate calculations. 0 0

Explanation / Answer

Dividend yield =D1/ price

.04 =D1/37

D1= 37*.04= 1.48

cost of equity =[D1/(price-flotation cost) ] +g

           = [1.48 /37(1-.05)] +.098

          = [1.48 /35.15]+.098

         = .0421+.098

        = .1401 or 14.01%

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