Bouchard Company's stock sells for $20 per share, its last dividend (D0) was $1.00, its growth rate is a constant 6 percent, and the company would incur a flotation cost of 20 percent if it sold new common stock. Which of the following is the cost of issuing new common stock? (Round off the answer to two decimal places.)

Question

Quizplus · Accepted Answer

The cost of issuing new common stock is given by the following formula:
Cost of new equity = (D1 / (P0 * (1 - Flotation cost))) + g
D1 = D0 * (1 + g) = $1.06
P0 = $20
Flotation cost = 20%
Substituting the values in the formula, we get:
Cost of new equity = ($1.06 / ($20 * (1 - 0.20))) + 0.06 = 0.1263 or 12.63%
Therefore, the cost of issuing new common stock is 12.63%.

Bouchard Company's Stock Sells for $20 Per Share, Its Last