Oval Inc. just paid a dividend equal to $1.50 per share on its common stock, and it expects this dividend to grow by 4 percent per year indefinitely. The firm plans to issue common stock, which has a $16 per share market price, to raise funds to support operations. Oval's investment bankers estimate that the flotation costs for new issues of common stock will be equal to 8 percent of the issue (market) price. What is Oval's cost of new common equity, r_e?

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The cost of new common equity, $r_e$, can be calculated using the dividend discount model (DDM) adjusted for flotation costs. The formula for the cost of new equity considering flotation costs is:$$r_e = \frac{D_1}{P_0(1 - f)} + g$$Where:- $D_1$ is the dividend expected at the end of the first year, which is $1.50*(1+4\%) = $1.56.- $P_0$ is the current market price per share, which is $16.- $f$ is the flotation cost as a percentage of the issue price, which is 8% or 0.08.- $g$ is the growth rate of the dividend, which is 4% or 0.04.Plugging the values into the formula gives:$$r_e = \frac{1.56}{16(1 - 0.08)} + 0.04 = \frac{1.56}{14.72} + 0.04 = 0.1059 + 0.04 = 0.1459$$Converting to percentage gives 14.59%, which rounds to 14.60%.

Oval Inc Just Paid a Dividend Equal to $1