Question

eaver Chocolate Co. expects to earn $3.50 per share during the current year, its expecteddividend payout ratio is 65%, its expected constant dividend growth rate is 6.0%, and its common stock currently sellsfor $32.50 per share. New stock can be sold to the public at the current price, but a flotation cost of 5% would be incurred. What would be the cost of equity from new common stock

Answer 1

cost of equity = 13.36 %

Step-by-step explanation:

given data

earn = $3.50

ratio = 65%

growth rate = 6.0%

common stock currently sells = $32.50

flotation cost = 5%

to find out

cost of equity from new common stock

solution

we get here cost of equity from new common stock that is express as

cost of equity =
`(D1)/(Po-(1-f))` + g ...................1

here D1 is expected dividend and Po is current price and g is growth rate and f is flotation cost and

D1 = 3.50 × 0.65

so from equation 1 we get

cost of equity =
`(3.50*0.65)/(32.50(1-0.05))` + 6%

cost of equity = 0.1336

cost of equity = 13.36 %