Stever\'s Specialties, Inc. paid its dividene yesterday, which was $3.50. The di

Question

Stever's Specialties, Inc. paid its dividene yesterday, which was $3.50. The dividend had been growing at a rate of 0.010 and is expected to continue indefinitely at that rate. Steve's common stock is currently trading at 21.00 per shar. The firms beta is 1.12. Treasuries (T-bills) are currently yielding 0.020, Average return on the market is 0.11. If the firm issues new common stock, it can be sold at the current market price and the flotation costs are expected to be 0.13 times the market price per share. Using the DCF approach, what is Steve's cost of new common equity? Answer in decimal form to 4 places. Do not use a percent sign.

Explanation / Answer

DCF approach:

Cost of equity = D1 / (P0 * (1 - F)) + g

= 3.50 * (1 + 0.010) / (21 * (1 - 0.13)) + 0.010

= 0.2035

OR

20.35%

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