8. COST OF COMMON EQUITY WITH FLOTATION Banyan Co.’s common stock currently sell

Question

8. COST OF COMMON EQUITY WITH FLOTATION Banyan Co.’s common stock currently sells for $55.00 per share. The growth rate is a constant 7.8%, and the company has an expected dividend yield of 2%. The expected long-run dividend payout ratio is 35%, and the expected return on equity (ROE) is 12%. New stock can be sold to the public at the current price, but a flotation cost of 15% would be incurred. What would be the cost of new equity? Round your answer to two decimal places. Do not round your intermediate calculations.

Explanation / Answer

Answer)

Cost of new equity = [Expected divided / Price *(1-Flotation cost) ] + Growth rate

Growth rate = 7.8%

Dividend yield = Annual dividend / current stock price

2% = Annual dividend / 55

Annual dividend = 2%*55 =1.10

Cost of equity = 1.10 *(1+0.078) / 55 *(1-0.15) +0.078 =0.10336 or 10.336%

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