COST OF EQUITY WITH AND WITHOUT FLOTATION (2 PART ANSWER) Jarett & Sons\'s commo
ID: 2797763 • Letter: C
Question
COST OF EQUITY WITH AND WITHOUT FLOTATION (2 PART ANSWER)
Jarett & Sons's common stock currently trades at $39.00 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 4% 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 18% 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.
______%
COST OF EQUITY WITH AND WITHOUT FLOTATION (2 PART ANSWER)
Jarett & Sons's common stock currently trades at $39.00 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 4% 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 18% 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
1. cost of common equity=(Dividend for next period/Current price)+Growth rate
=(1.25/39)+0.04
=7.21%
2. cost of common equity=(Dividend for next period/Current price(1-floatation cost)+Growth rate
=1.25/(39(1-0.18)+0.04
=1.25/31.98+0.04
=7.91%(Approx)