Question

Sunny Day Manufacturing Company has a current stock price of $33.35 per share, and is expected to pay a per-share dividend of $2.03 at the end of the year. The company’s earnings’ and dividends’ growth rate are expected to grow at the constant rate of 8.70% into the foreseeable future. If Sunny Day expects to incur flotation costs of 6.50% of the value of its newly-raised equity funds, then the flotation-adjusted (net) cost of its new common stock (rounded to two decimal places) should be .

Answer 1

Flotation adjusted cost of equity is 15.21% .

Step-by-step explanation:

Current Stock price, P = $33.35 per share

Flotation cost, F = 6.50%

Net proceed from sale of stock = P × (1 - F)

= $33.35 × (1 - 6.50%)

= $31.18225

Net proceed from sale of stock is $31.18225.

Flotation adjusted cost of equity:

= (Expected dividend ÷ Net Proceed from sale of equity) + Growth rate

= ($2.03 ÷ $31.18225) + 8.70%

= 6.51% + 8.70%

= 15.21%

Flotation adjusted cost of equity is 15.21% .