Please show all work, including formulas. Thank You. Javits & Sons\' common stoc

Question

Please show all work, including formulas. Thank You.

Javits & Sons' common stock currently trades at $33.00 a share. It is expected to pay an annual dividend of $1.25 a share at the end of the year (D1 = $1.25), and the constant growth rate is 3% 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 17% flotation cost. What would the cost of equity from new stock be? Round your answer to two decimal places.

Explanation / Answer

A companys cost of equity is given by

r = D1/P +g

1.25/33 +3%

=6.78%

b) New stock would be issued 33*0.17=

Total stock price = 38.61

= 1.25/38.61 +3%

=6.2375%

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