Newcomb Industries’ common stock currently trades at $40 a share. It is expected
ID: 2802516 • Letter: N
Question
Newcomb Industries’ common stock currently trades at $40 a share. It is expected to pay an annual dividend of $2.40 a share at the end of the year (D1 = $2.40), and the constant growth rate is 4.2 percent a year. If the company were to issue new stock, it would incur a 7 percent flotation cost. What would the cost of equity from new stock be?
Newcomb Industries’ common stock currently trades at $40 a share. It is expected to pay an annual dividend of $2.40 a share at the end of the year (D1 = $2.40), and the constant growth rate is 4.2 percent a year. If the company were to issue new stock, it would incur a 7 percent flotation cost. What would the cost of equity from new stock be?
Explanation / Answer
cost of equity from new stock=(Dividend for next period/(Current price(1-floatation cost))+Growth rate
=2.4/(40(1-0.07))+0.042
=2.4/37.2+0.042
=10.65%(Approx).