If the company plans to pay a dividend of $4 per share next year, and the price of the stock is $45, the growth rate is projected as 7%, and the flotation costs are 6% of the issue price. Calculate the cost of new equity.
A) 1.65%
B) 0.165%
C) 16%
D) 16.5%

Question

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 next year, P0 is the current price of the stock, F is the flotation cost as a decimal, and g is the growth rate. Plugging in the values: Cost of New Equity = ($4 / ($45 * (1 - 0.06))) + 0.07 = ($4 / $42.3) + 0.07 = 0.09456 + 0.07 = 0.16456 or 16.46%, which rounds to 16.5%.

If the Company Plans to Pay a Dividend of $4