Jiffy Co.expects to pay a dividend of $3.00 per share in one year.The current price of Jiffy common stock is $60 per share.Flotation costs are $3.00 per share when Jiffy issues new stock.What is the cost of internal common equity (retained earnings)if the long-term growth in dividends is projected to be 8 percent indefinitely?

Question

Quizplus · Accepted Answer

The cost of internal common equity (retained earnings) can be calculated using the Gordon Growth Model (Dividend Discount Model for a perpetually growing dividend), which is given by the formula: Cost of Equity = (D1 / P0) + g, where D1 is the dividend in the next period, P0 is the current price of the stock, and g is the growth rate. Plugging in the values: Cost of Equity = ($3 / $60) + 0.08 = 0.05 + 0.08 = 0.13 or 13%.

Jiffy CoExpects to Pay a Dividend of $3