Question
In: Finance
A stock is trading for 15, and just paid a dividend of 0.8 which is expected...
A stock is trading for 15, and just paid a dividend of 0.8 which is expected to grow at a fraction 0.08 per year. If Goldman Sacs charges a fraction 0.10 as a flotation cost, what is the required rate of return on a new stock issue?
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Expert Solution
Information provided:
Current stock price= $15
Current dividend= 0.8
Dividend growth rate= 8%
Flotation cost= 10%
The required return on new stock issue is computed as:
Required return on new stock issue = Next year’s dividend/ Share price (1-Flotatin cost)+ growth rate
= $0.80(1 + 0.08)/ $15*(1 – 0.10) + 0.08
= $0.8640/ $13.50 + 0.08
= 0.0640 + 0.08
= 0.1440*100
= 14.40%
In case of any query, kindly comment on the solution.
jeff jeffy answered 10 months agoRelated Solutions
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