Problem 10-4 Cost of Equity with and without Flotation Jarett & Sons\'s common s

Question

Problem 10-4
Cost of Equity with and without Flotation

Jarett & Sons's common stock currently trades at $30.00 a share. It is expected to pay an annual dividend of $2.50 a share at the end of the year (D1 = $2.50), and the constant growth rate is 6% 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 16% 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.
___ %

Please answer accurately, be clear about what the answer is as well to receive a good review. Thank you! I made it two different ways to make it easy to read

Problem 10-4 Cost of Equity with and without Flotation lerett & Sons's common stock currently trades at s 30 a share. It is expected to pay an annual dividend of $2 50 a share at the end of the yea Di-s2 0 and the constant growth a ei 6% 1w a 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. Do not round your intermediate calculations. eBook Problem Walk-Through If the company issued new stock, it would incur a 16% 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. Check My Work (a remaining)

Explanation / Answer

Using dividend discount model, the cost of equity is

Po = D1/(r-g)

D1 is divident pays at the end of year 1

r - interest rate

g - gorwth rate

30 = 2.5/(r - 0.06)

r = 2.5/30 + 0.06 = 0.143 = 14.3%

Floatation cost is nothing but cost associated with cost of issuing a new stocks that includes legal, underwrtting and registration fees.

Cost of Equity = Dividend / (Price * (1-Flotation Cost) ) + Growth Rate

= 2.5/(30*(1-0.16)) + 0.06

= 9.98% ~ 10%

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