An analyst has collected the following information regarding Christopher Co.: · The company's capital structure is 70 percent equity, 30 percent debt. · The yield to maturity on the company's bonds is 6 percent. · The company's year-end dividend (D1) is forecasted to be $0.8 a share. · The company expects that its dividend will grow at a constant rate of 6 percent a year. · The company's stock price is $25. · The company's tax rate is 40 percent. · The company anticipates that it will need to raise new common stock this year. Its investment bankers anticipate that the total flotation cost will equal 10 percent of the amount issued. Assume the company accounts for flotation costs by adjusting the cost of capital. Given this information, calculate the company's cost of new equity. Round it to two decimal places.
Company's cost of new equity.
Here, we’ve Dividend in Year 1 (D1) = $0.80 per share
Current Share Price (P0) = $25.00 per share
Dividend Growth Rate (g) = 6.00% per year
Flotation Cost (FC) = 10.00%
Using the Dividend Discount Model, the Company's cost of new equity = [D1 / P0(1 – FC)] + g
= [$0.80 / $25.00(1 – 0.10)] + 0.06
= [$0.80 / ($25.00 x 0.90)] + 0.06
= [$0.80 / $22.50] + 0.06
= 0.0356 + 0.06
= 0.0956 or
= 9.56%
“Hence, the Company's cost of new equity will be 9.56%”
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