Cost of Equity with and without Flotation Jarett & Sons\'s common stock currentl
ID: 2793558 • Letter: C
Question
Cost of Equity with and without Flotation Jarett & Sons's common stock currently trades at $27.00 a share. It is expected to pay an annual dividend of $1.25 a share at the end of the year (D1 = $1.25), and the constant growth rate is 7% 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. Do not round your intermediate calculations. % If the company issued new stock, it would incur a 20% flotation cost. What would be the cost of equity from new stock? Round your answer to two decimal places. Do not round your intermediate calculations. %
Explanation / Answer
a.Cost of equity=(Dividend for next period/Current price)+Growth rate
=(1.25/27)+0.07
=11.63%(Approx)
b.Cost of equity=(Dividend for next period/Current price(1-floatation cost)+Growth rate
=1.25/(27(1-0.2))+0.07
=1.25/21.6+0.07
=12.79%(Approx)