Question

You are required to show the following 3 steps for each problem (sample questions and solutions are provided for guidance):

(i) Describe and interpret the assumptions related to the problem.

(ii) Apply the appropriate mathematical model to solve the problem.

(iii) Calculate the correct solution to the problem. Submit all answers as percentages and round to two decimal places.

QUESTION : Raven Co. expects to pay a dividend of $3.15 per share in one year. The current price of their common stock is $36.40 per share. Flotation costs are $6.00 per share when Raven issues new stock. What is the cost of internal common equity if the long-term growth in dividends is projected to be 3.85 percent indefinitely?

Answer 1

Cost of internal common equity D1-P0+g Here, Net stock price (PO) Expected dividend (D1) Growth rate (g) $ $ 36.4 3.15 3.85% Cost of internal common equity | 12.50% 3.15:36.4+3.85%

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