What would be the cost of new common stock equity for Tangshan Mining if the firm just paid a dividend of $4.25, the stock price is $55.00, dividends are expected to grow at 8.5 percent indefinitely, and flotation costs are $6.25 per share?
A) 17.96%
B) 16.88%
C) 9.46%
D) none of the above

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. D1 = $4.25 * (1 + 0.085) = $4.61. Cost of Equity = ($4.61 / ($55.00 - $6.25)) + 0.085 = 17.96%.

What Would Be the Cost of New Common Stock Equity