Question
In: Finance
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?
Solutions
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%
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