You were recently hired by Garrett Design, Inc.to estimate its cost of common equity.You obtained the following data: D₁ = $1.75; P₀ = $42.50; g_L = 7.00% (constant); and F = 5.00%.What is the cost of equity raised by selling new common stock?

Question

Quizplus · Accepted Answer

The cost of common equity raised by selling new common stock can be estimated using the following formula:
rS1U1B0 = (DS1U1B11S1U1B0 / PS1U1B10S1U1B0) + gS1U1B1LS1U1B0
where:
DS1U1B11S1U1B0 = the expected dividend per share next year
PS1U1B10S1U1B0 = the current market price per share
gS1U1B1LS1U1B0 = the expected constant growth rate of dividends
Plugging in the given numbers, we get:
rS1U1B0 = ($1.75 / $42.50) + 0.07 = 0.1133 or 11.33%
Hence, the answer is B.

You Were Recently Hired by Garrett Design, Inc