Alpha Moose Transporters has a current stock price of $26 per share, and is expected to...

Alpha Moose Transporters has a current stock price of $26 per share, and is expected to pay a per-share dividend of $4.90 at the end of next year. The company’s earnings and dividends growth rate are expected to grow at a constant rate of 5.20% into the foreseeable future. If Sunny Day expects to incur flotation costs of 4.25% 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 ___?

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Expert Solution

According to dividend discount model cost of equity is

= dividend for year 1/(price less flotation cost ) + growth

given floatation cost is 4.25%

price less flotation cost is 26-4.25% = 24.895

Ke = 4.9/24.895 + 0.0520 = 24.88%

So cost of equity is 24.88%

jeff jeffy answered 2 years ago

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