Question

Problem 10-4 Cost of Equity with and without Flotation Jarett & Sons's common stock currently trades at $20.00 a share. It is expected to pay an annual dividend of $3.00 a share at the end of the year (D: - $3.00), and the constant growth rate is 8% 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. 5. If the company issued new stock, it would incur a 19% 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.

Answer 1

Answer of Part a:

D1 = $3

P0 = $20

G = 8%

Cost of Common Equity = $3 / $20 + 0.08
Cost of Common Equity = 0.15 + 0.08
Cost of Common Equity = 0.23 or 23%

Answer of Part b:

Net Proceeds = $20 - $20 * 19%
Net Proceeds = $20 - $3.8
Net proceeds = $16.2

Cost of Equity = D1 / Net Proceeds + Growth Rate
Cost of Equity = $3 / $16.2 + 0.08
Cost of Equity = 0.1852 + 0.08
Cost of Equity = 0.2652 or 26.52%