Question

The Evanec Company's next expected dividend, D1, is $3.84; its growth rate is 7%; and its common stock now sells for $39.00. New stock (external equity) can be sold to net $31.20 per share.

Answer 1

EXISTING STOCK

Ke = D1/Po + g

Ke = $3.84/$39 + 0.07

Ke = 0.0985 + 0.07

Ke = 0.1685 = 16.85%

NEW STOCK

Ke = $3.84/$31.20 + 0.07

Ke = 0.1231 + 0.07

Ke = 0.1931 = 19.31%

Step-by-step explanation:

Cost of equity is a function of expected dividend(D1) divided by the current market price plus growth rate.