The following financial information is available on Rawls Manufacturing Company: $\begin{array}{ll}
\text {Current per share market price }& \$48.00\
\text { Current $ (t=0) $ per share dividend}&\$3.50 \
\text {Expected long-term growth rate }&5.0\% \
\end{array}$
? Rawls can issue new common stock to net the company $44 per share. Determine the cost of internal equity capital using the dividend capitalization model approach. (Compute answer to the nearest 0.1%.)

Question

The following financial information is available on Rawls Manufacturing Company: $\begin{array}{ll}
\text {Current per share market price }& \$48.00\
\text { Current $ (t=0) $ per share dividend}&\$3.50 \
\text {Expected long-term growth rate }&5.0\% \
\end{array}$
 ? Rawls can issue new common stock to net the company $44 per share. Determine the cost of internal equity capital using the dividend capitalization model approach. (Compute answer to the nearest 0.1%.)

Quizplus · Accepted Answer

The cost of internal equity capital using the dividend capitalization model is calculated as: $(D_1 / P_0) + g$, where $D_1$ is the expected dividend next year, $P_0$ is the current market price, and $g$ is the growth rate. Here, $D_1 = 3.50 \times (1 + 0.05) = 3.675$, $P_0 = 48$, and $g = 0.05$. Thus, the cost is $(3.675 / 48) + 0.05 = 0.127 = 12.7\%$.

The Following Financial Information Is Available on Rawls Manufacturing Company