(Cost of Equity) Alarm Protect issued new common stock whichpaid a $1.26 per share dividend...

(Cost of Equity) Alarm Protect issued new common stock which paid a $1.26 per share dividend last year. The par value for the stock is $25.00, and earnings per share (EPS) will grow at 5% per year forever. Alarm Protect pays out 40% of its earnings in dividends. The current price of the stock is $29.62, but 3% flotation costs are expected. What is the cost of equity?

Expert Solution

- Dividend paid last year(D0) = $1.26

Current price of Stock(P0) = $29.62

Growth rate(g) = 5% per year forever

Note- As Dividend payout ratio is same, thus growth rate of EPS will be same for Dividend

Flotation Cost = 3%

calculating cost of equity(ke) :-

Ke = 9.60%

So, he cost of equity is 9.60%

jeff jeffy answered 2 years ago

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