Verigreen Lawn Care products just paid a dividend of $1.85.This dividend is expected to grow at a constant rate of 3% per year,so the next expected dividend is $1.90.The stock price is currently $12.50.New stock can be sold at this price subject to flotation costs of 15%.The company's marginal tax rate is 40%.Compute the cost of ordinary equity.

Question

Quizplus · Accepted Answer

The cost of ordinary equity can be calculated using the Gordon Growth Model (Dividend Discount Model) adjusted for flotation costs. The formula is: Cost of Equity = (D1 / (P0 * (1 - Flotation Cost))) + Growth Rate. Here, D1 = $1.90, P0 = $12.50, Flotation Cost = 15% or 0.15, and Growth Rate = 3% or 0.03. Plugging in the values: Cost of Equity = ($1.90 / ($12.50 * (1 - 0.15))) + 0.03 = 18.2%.

Verigreen Lawn Care Products Just Paid a Dividend of $1