Question

Please answer or give me a hint for the following question.

T Company’s ordinary share dividends have grown over the past 5-year period from $0.69 per share to $0.89 (today). Assume that T’s dividends are expected to grow at this rate for the foreseeable future. T’s stock is currently selling for $10.50 per share. New common stock can be sold to net the company (ie after capital raising costs) $9.90 per share. Determine the costs of internal and external equity to T.

Answer 1

Dividend growth rate
1+g=	(0.89/0.69)^(1/5)
1+g=	1.052224
g=	0.052224
g=	5.22%
Cost of internal Equity
Share Price	= Current Dividend* (1+growth)/(Rate of return-Growth Rate)
Share Price	= 0.89 * (1+ 5.22%)/(Rate of return-5.22%)
10.5	= 0.89 * (1+ 5.22%)/(Rate of return-5.22%)
10.5	= 0.94/(Rate of return-5.22%)
10.5/0.94	= 1/(Rate of return-5.22%)
11.17021277	= 1/(Rate of return-5.22%)
(Rate of return-5.22%)	= 1/11.17
(Rate of return-5.22%)	0.089526
Rate of return=	0.0522+0.08952
Rate of return=	0.14172
Rate of return=	14.17%
Cost of external Equity
9.9	= 0.94/(Rate of return-5.22%)
9.9/0.94	= 1/(Rate of return-5.22%)
10.53191489	= 1/(Rate of return-5.22%)
(Rate of return-5.22%)	= 1/10.53
(Rate of return-5.22%)	0.094967
Rate of return=	0.09496+0.0522
Rate of return=	0.14716
Rate of return=	14.72%