Javits & Sons common stock currently trades at $30 ashare. It is expected to pay

Question

Javits & Sons common stock currently trades at $30 ashare. It is expected to pay an annual dividend of $3.00 ashare at the end of the year (D1 = $3.00), and theconstant growth rate is 5 percent a year. a. What is the company's cost of common equity if all ofits equity comes from retained earnings? b. If the company were to issue new stock, it wouldincur a 10 percent flotation cost. What would the cost ofequity from new stock be? Javits & Sons common stock currently trades at $30 ashare. It is expected to pay an annual dividend of $3.00 ashare at the end of the year (D1 = $3.00), and theconstant growth rate is 5 percent a year. a. What is the company's cost of common equity if all ofits equity comes from retained earnings? b. If the company were to issue new stock, it wouldincur a 10 percent flotation cost. What would the cost ofequity from new stock be?

Explanation / Answer

Current Stock Value ofJavits & Sons $30 Expected Annual dividend(D1) $3 Constant Dividend Growth Rate(g) 5% (a) CalcualtingCost Common Equity (Ke) = ( D1 /P0) + g     Cost of Common Equity (Ke) = ($3 / $30) +0.05     Cost of Common Equity (Ke) = 0.1 +0.05     Cost of Common Equity (Ke) = 0.15 (or)15% (b) CalculatingCost of Equity from New Stock:     Cost of Equity (Ke) = [ {D1 /P0 (1-F) } + g]     Cost of Equity (Ke) = [ { $3 / $30 (1-0.10) }+ 0.05]     Cost of Equity (Ke) = [ {$3 / $27} +0.05]      Cost ofEquity (Ke) = [ 0.11 + 0.05 ]     Cost if Equity (Ke) from new stock = 0.16 (or)16% Current Stock Value ofJavits & Sons $30 Expected Annual dividend(D1) $3 Constant Dividend Growth Rate(g) 5% (a) CalcualtingCost Common Equity (Ke) = ( D1 /P0) + g     Cost of Common Equity (Ke) = ($3 / $30) +0.05     Cost of Common Equity (Ke) = 0.1 +0.05     Cost of Common Equity (Ke) = 0.15 (or)15% (b) CalculatingCost of Equity from New Stock:     Cost of Equity (Ke) = [ {D1 /P0 (1-F) } + g]     Cost of Equity (Ke) = [ { $3 / $30 (1-0.10) }+ 0.05]     Cost of Equity (Ke) = [ {$3 / $27} +0.05]      Cost ofEquity (Ke) = [ 0.11 + 0.05 ]     Cost if Equity (Ke) from new stock = 0.16 (or)16%

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