Overland paid a dividend of $3 last year and its stock is selling at $75 per share. A constant growth rate of 5% is expected. Overland's flotation costs for a new issue are 10% and the marginal tax rate is 40%.Calculate the cost of new equity.

Question

Quizplus · Accepted Answer

The cost of new equity can be calculated using the Gordon Growth Model: Cost of new equity = (D1 / (P0 * (1 - F))) + g, where D1 is the expected dividend next year ($3 * 1.05 = $3.15), P0 is the current stock price ($75), F is the flotation cost (10% or 0.10), and g is the growth rate (5% or 0.05). Plugging in the values: Cost of new equity = ($3.15 / ($75 * (1 - 0.10))) + 0.05 = 9.7%.

Overland Paid a Dividend of $3 Last Year and Its