Question

Caspian Sea Drinks needs to raise $51.00 million by issuing additional shares of stock. If the market estimates CSD will pay a dividend of $2.38 next year, which will grow at 3.59% forever and the cost of equity to be 12.72%, then how many shares of stock must CSD sell?

With steps

Answer 1

Dividend (D1) = $2.38

Cost of Equity (Ke) = 12.72%

Growth rate (g) = 3.59%

P = D1 / (Ke - g)

P = $2.38 / (0.1272 - 0.0359)

P = $2.38 / 0.0913

P = $26.067908

Number of shares of stock must CSD sell is $51,000,000 / ($26.067908)

= 1,956,429 shares