Question

8IulLIL X Attempts Keep the Highest: /2 4. Problem 10.04 A- Click here to read the eBook: The Cost of Retained Earnings, rs Click here to read the eBook: Cost of New Common Stock, re HProblem Walk-Through COST OF EQUITY WITH AND WITHOUT FLOTATION Jarett & Sons's common'stock currently trades at $38.00 a share. It is expected to pay an annual dividend of $1.50 a share at the end of the year (D, $1.50) and the constant growth rate is 5 % 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 8% 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. % oat Save &Continue Grade It Novw Continue without saving at NOV 2

Answer 1

a. The cost of common equity is computed as shown below:

= Expected dividend / Current stock price + growth rate

= $ 1.50 / $ 38 + 5%

= 8.95% Approximately

b. The cost of common equity is computed as shown below:

= Expected dividend / [ Current stock price - flotation cost ] + growth rate

= $ 1.50 / ( $ 38 - 8% ) + 5%

= 9.29% Approximately

Feel free to ask in case of any query relating to this question