The following financial information is available on Rawls Manufacturing Company: $$\begin{array} { l r }
\text { Current per share market price } & \$ 48.00 \
\text { Current per share dividend } & \$ 3.50 \
\text { Current per share earnings } & \$ 6.00 \
\text { Beta } & 12.0 \% \
\text { Expected rate of return on market } & 6.0 \% \
\text { Risk-free rate } & 5.0 \%
\end{array}$$ ? Rawls can issue new common stock to net the company $44 per share. Determine the cost of external 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: $$\begin{array} { l r } 
\text { Current per share market price } & \$ 48.00 \
\text { Current per share dividend } & \$ 3.50 \
\text { Current per share earnings } & \$ 6.00 \
\text { Beta } & 12.0 \% \
\text { Expected rate of return on market } & 6.0 \% \
\text { Risk-free rate } & 5.0 \%
\end{array}$$ ? Rawls can issue new common stock to net the company $44 per share. Determine the cost of external equity capital using the dividend capitalization model approach. (Compute answer to the nearest 0.1%.)

Quizplus · Accepted Answer

The cost of external equity capital using the dividend capitalization model is calculated as: $(D_1 / P_0) + g$, where $D_1$ is the dividend next year, $P_0$ is the net price per share, and $g$ is the growth rate. Assuming dividends grow at the rate of earnings growth, $g = (Earnings\ growth\ rate) = (3.50/6.00) = 0.5833$. Thus, the cost is $(3.50/44) + 0.5833 = 0.0795 + 0.5833 = 13.4\%$.

The Following Financial Information Is Available on Rawls Manufacturing Company