If the dividend to be paid on a share of common stock $3.30 per share at t₁, and the price of the stock is $50, the growth rate is projected as 6%, and the underwriting fee is 5% of the stock price, calculate the cost of new equity. A) 12.95% B) 12.30% C) 12% D) 12.65%

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Quizplus · Accepted Answer

The cost of new equity can be calculated using the formula: Cost of new equity = (D1 / P0(1 - F)) + g, where D1 is the dividend to be paid next year, P0 is the price of the stock, F is the underwriting fee as a decimal, and g is the growth rate. Here, D1 = $3.30, P0 = $50, F = 5% or 0.05, and g = 6% or 0.06. Plugging these values into the formula gives: Cost of new equity = ($3.30 / $50(1 - 0.05)) + 0.06 = ($3.30 / $47.50) + 0.06 = 0.06947 + 0.06 = 0.12947 or 12.95%.

If the Dividend to Be Paid on a Share of Common