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 must pay flotation cost equal to 20 percent when it issues new common stock. What is Bouchard's cost of issuing new common stock?

Question

Quizplus · Accepted Answer

First, we need to calculate the cost of equity using the Gordon growth model:
Ke = (D1 / P0) + g
D1 = D0 * (1 + g) = $1.06
Ke = ($1.06 / $20) + 0.06 = 0.116 or 11.6%
Next, we need to adjust for flotation costs:
Ks = Ke / (1 - F)
F = 0.20
Ks = 0.116 / (1 - 0.20) = 0.145 or 14.5%
Therefore, the cost of issuing new common stock for Bouchard Company is 12.63% (rounded to two decimal places).

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