Montreal Trustco expects to pay a dividend of $5 next year.Dividends are expected to grow at 3 percent forever and the market requires a rate of return of 7 percent on its stock.Montreal Trustco can issue new stock at $125 per share with flotation costs of $20 per share.The tax rate is zero.The cost of issuing new equity to Montreal Trustco is:

Question

Quizplus · Accepted Answer

K = 5 / (125 - 20)+ 3% = 7.76%

Montreal Trustco Expects to Pay a Dividend of $5 Next