The cost of new common stock equity for Tangshan Mining would be 17.60 percent if the firm just paid a dividend of $4.00, the stock price is $50.00, dividends are expected to grow at 8 percent indefinitely, and flotation costs are $5.00 per share.

Question

Quizplus · Accepted Answer

The cost of new common stock equity can be calculated using the formula: Cost of Equity = (D1 / (P0 - F)) + g, where D1 is the expected dividend next year, P0 is the current stock price, F is the flotation cost, and g is the growth rate. Here, D1 = $4.00 * (1 + 0.08) = $4.32, P0 = $50.00, F = $5.00, and g = 0.08. Thus, Cost of Equity = ($4.32 / ($50.00 - $5.00)) + 0.08 = 0.176 or 17.60%.

The Cost of New Common Stock Equity for Tangshan Mining