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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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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 4 months ago
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