10. Banyan Co.’s common stock currently sells for $53.25 per share. The growth rate is a constant 5%, and the company has an expected dividend yield of 6%. The expected long-run dividend payout ratio is 50%, and the expected return on equity (ROE) is 10.0%. New stock can be sold to the public at the current price, but a flotation cost of 10% would be incurred. What would be the cost of new equity? Do not round intermediate calculations. Round your answer to two decimal places.
%
Dividend = yield*price = 0.06*53.25 = 3.195
Growth rate=ROE*retention ratio |
growth rate=10*0.5 |
growth rate = 5 |
As per DDM |
Price(1-flotation %)= Dividend in 1 year/(cost of equity - growth rate) |
53.25*(1-0.1) = 3.195/ (Cost of equity - 0.05) |
Cost of equity% = 11.67 |
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