The common stock for the Bestsold Corporation sells for $62. If a new issue is sold,...
The common stock for the Bestsold Corporation sells for $62. If a new issue is sold, the flotation costs are estimated to be 9 percent. The company pays 60 percent of its earnings in dividends, and a $3.60 dividend was recently paid. Earnings per share 5 years ago were $4.00. Earnings are expected to continue to grow at the same annual rate in the future as during the past 5 years. The firm's marginal tax rate is 32 percent. Calculate the cost of:
(a) internal common equity and
(b) external common equity.
Homework Answers
EPS0 = 3.60/0.60 = $6.00
g = (6/4)1/5 - 1 = 8.45%
a.
For Internal Common Equity,
Using Constant Growth Model,
r = 3.60(1.0845)/62 + 0.0845
r = 14.75%
b.
For External Common Equity,
Using Constant Growth Model,
r = 3.60(1.0845)/(0.91*62) + 0.0845
r = 15.37%
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