Question

eBook Problem Walk-Through Jarett & Sons's common stock currently trades at $21.00 a share. It is expected to pay an annual dividend of $2.50 a share at the end of the year (D- $2.50), and the constant growth rate is 3% a year. a. What is the company's cost of common equity if all of its equity comes from retained earnings? Do not round intermediate calculations. Round your answer to two decimal places. b. If the company issued new stolk, it would incur a 10% flotation cost. What would be the cost of equity from new stock? Do not round intermediate calculations. Round your answer to two decimal places. O

Answer 1

a.

Using Constant Growth Model,

Cost of Equity = 2.50/21 + 0.03

Cost of Equity = 14.90%

b.

Using Constant Growth Model,

Cost of Equity = 2.50/(21(0.90)) + 0.03

Cost of Equity = 16.23%