Last year's dividend was $2.50, the anticipated constant growth rate is 4%, the selling price today is $28 per share, and flotation costs are 18%. What is the cost of new equity ?

Question

Quizplus · Accepted Answer

The cost of new equity is calculated as the dividend yield plus the growth rate, divided by one minus the flotation cost. In this case, the dividend yield is $2.50/$28 = 8.93%, the growth rate is 4%, and the flotation cost is 18%. Therefore, the cost of new equity is (8.93% + 4%)/(1 - 18%) = 15.3%.

Last Year's Dividend Was $2