Problem 10-4 Cost of equity with and without flotation Javits & Sons\' common st

Question

Problem 10-4 Cost of equity with and without flotation

Javits & Sons' common stock currently trades at $38 a share. It is expected to pay an annual dividend of $2.75 a share at the end of the year (D1 = $2.75), and the constant growth rate is 8% a year.

a. What is the company's cost of common equity if all of its equity comes from retained earnings. Round your answer to two decimal places.
%

b. If the company were to issue new stock, it would incur a 14% flotation cost. What would the cost of equity from new stock be? Round your answer to two decimal places.
%

Explanation / Answer

a. Cost of common equity 38 = 2.75/(d-0.08) d-0.08 = 0.07237 d=0.1524 = 15.24% b. Stock Price = 38*(1-0.14) = $32.68 32.68 = 2.75/(d-0.08) d=0.0841+0.08 = 0.1641 = 16.41%

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