O Click here to read the eBook: Cost of New Common Stock, re COST OF COMMON EQUI

Question

O Click here to read the eBook: Cost of New Common Stock, re COST OF COMMON EQUITY WITH FLOTATION Banyan Co.'s common stock currently sells for $43.25 per share. The growth rate is a constant 11.2%, and the company has an expected dividend yield of 6%. The expected long-run dividend payout ratio is 30%, and the expected return on equity (ROE) is 16%. 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. 10. 12. 13. 14

Explanation / Answer

Current price of stock,P0 = $43.25

Growth rate, g = 11.2%

Flotation cost = 15%

Net proceeds from sale of stock = $43.25 - 15% = $36.7625

Expected dividend yield = Dividend/Net proceeds

6% = Dividend/$36.7625

Expected dividend,DPS1 = $36.7625 *6% = $2.20575

Cost of new equity, Ke = (Dividend/Net proceeds) + g

= ($2.20575/$36.7625) + 11.2%

= 0.06 + 0.112

= 0.172 = 17.2%

Flotation cost

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