3. Jarett & Sons\'s common stock currently trades at $33.00 a share. It is expec

Question

3.

Jarett & Sons's common stock currently trades at $33.00 a share. It is expected to pay an annual dividend of $2.00 a share at the end of the year (D1 = $2.00), and the constant growth rate is 5% a year.

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. Do not round your intermediate calculations.
%

If the company issued new stock, it would incur a 11% flotation cost. What would be the cost of equity from new stock? Round your answer to two decimal places. Do not round your intermediate calculations.
%

Explanation / Answer

From retained earnings:

cost of common equity=(Dividend for next period/Current price)+Growth rate

=(2/33)+0.05

=11.06%

From new stock:

cost of common equity=(Dividend for next period/Current price(1-floatation costs)+Growth rate

=(2/(33(1-0.11))+0.05

=11.81%(Approx)

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