High Valley Antiques would like to issue new equity shares if its cost of equity declines to 10.5 percent. The company pays a constant annual dividend of $1.60 per share. What does the market price of the stock need to be for the firm to issue the new shares?

Question

Quizplus · Accepted Answer

The market price of the stock needs to be such that the dividend yield equals the cost of equity. Using the formula for dividend yield: Dividend/Price = Cost of Equity, we have $1.60/Price = 0.105. Solving for Price gives $1.60/0.105 = $15.24.

High Valley Antiques Would Like to Issue New Equity Shares