10. Beta Corporation issued new common stock at a market price of 40 Lira. Dividends last...

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10. Beta Corporation issued new common stock at a market price of 40 Lira. Dividends last year were 2 Lira and are expected t

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Answer 1

Answer #1

Cost of new equity = [ D1 / { Po × ( 1- F ) } ]+ G

Where, D1 = Dividend for the next year = Dividend for the last year + growth rate = 2 Lira + 4% = 2.08 Lira

Po = issue price = 40 Lira

F = flotation cost ratio to issue price = 1.5 / 40 = 0.0375

G = growrh rate = 4%

A. Cost of equity for the new issue = [ 2.08 / { 40 × ( 1- 0.0375 ) } ] + 0.04 = 9.40% rounded off to 2 decimal places.

B. Required rate of return = ( D1 / Cost of equity ) + Growth rate = ( 2.08 Lira / 40 Lira ) + 0.04 = 9.2%

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Answer 2

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