Suppose that Brown-Murphies’ common shares sell for $18.00 per share, that the f

Question

Suppose that Brown-Murphies’ common shares sell for $18.00 per share, that the firm is expected to set their next annual dividend at $0.45 per share, and that all future dividends are expected to grow by 6 percent per year, indefinitely. Assume Brown-Murphies faces a flotation cost of 15 percent on new equity issues.

What will be the flotation-adjusted cost of equity? (Round your answer to 2 decimal places.)

Suppose that Brown-Murphies’ common shares sell for $18.00 per share, that the firm is expected to set their next annual dividend at $0.45 per share, and that all future dividends are expected to grow by 6 percent per year, indefinitely. Assume Brown-Murphies faces a flotation cost of 15 percent on new equity issues.

Explanation / Answer

Using Gordon's model, the cost of equity shall be calculated as follows:

Cost of equity=[Next Dividend]/[Current Price*(1-Floatation Cost)]+Growth rate of dividends

=0.45/[18*(1-15%)]+0.06

=8.94%

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