COST OF EQUITY WITH AND WITHOUT FLOTATION Jarett & Sons\'s common stock currentl
ID: 2798567 • Letter: C
Question
COST OF EQUITY WITH AND WITHOUT FLOTATION Jarett & Sons's common stock currently trades at $34.00 a share. It is expected to pay an annual dividend of $3.00 a share at the end of the year (D1 = $3.00), and the constant growth rate is 7% 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. Do not round your intermediate calculations. %
b. If the company issued new stock, it would incur a 15% 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
Cost of existing equity= (D1/ Share price)+ Dividend growth rate
= (3/ 34) + 0.07
= 0.0882352941176471 + 0.07
= 0.158235294117647
Cost of existing equity is 0.1582 or 15.82%
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Cost of new equity= [D1/ Share price*(1 - flotation cost)] + Growth rate
Where,
D0= Next year dividend= 3
Share Price = 34
Growth Rate = 0.07
Flotation Cost = 0.15
Lets put all the values in the formula,
= [3/ 34*(1 - 0.15)] + 0.07
= [3/ 34*(0.85)] + 0.07
= [3/ 28.9] + 0.07
= [0.103806228373702 + 0.07
= 0.173806228373702
Cost of new equity is 0.1738 or 17.38%
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Hope this answer your query.
Feel free to comment if you need further assistance. J