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Estimate this company's cost of common equity. This is a set of data you were able...

Estimate this company's cost of common equity.

This is a set of data you were able to collect. Upcoming dividend (D1) = $2.25; Price as of today = $27.50; Capial Gain Yield= 7.00% (constant); and F = 10.00%; Tax rate =40%.

What is the cost of equity raised by selling new common stock?

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Expert Solution

Price after flotation cost = Current price (1 - flotation cost)

Price after flotation cost = 27.5 (1 - 0.1)

Price after flotation cost = $24.75

cost of equity = (Year 1 dividend / price) + growth rate

cost of equity = (2.25 / 24.75) + 0.07

cost of equity = 0.09091 + 0.07

cost of equity = 0.1609 or 16.09%

jeff jeffy answered 2 years ago
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