You were recently hired by Nast Media Inc.to estimate its cost of capital.You were provided with the following data: D₁ = $2.00; P₀ = $55.00; g = 8.00% (constant); and F = 5.00%.What is the cost of equity raised by selling new common stock?

Question

Quizplus · Accepted Answer

The cost of equity raised by selling new common stock can be calculated using the Gordon Growth Model as follows: Cost of Equity = (Dividend per Share / Price per Share) + Growth Rate Where, Dividend per Share = D₁ = $2.00 Price per Share = P₀ = $55.00 Growth Rate = g - F = 8.00% - 5.00% = 3.00% Plugging in the values, we get: Cost of Equity = ($2.00 / $55.00) + 3.00% = 0.0364 + 0.0300 = 0.0664 = 6.64% Therefore, the cost of equity raised by selling new common stock is 6.64%, which is closest to option B) 11.83%.

You Were Recently Hired by Nast Media Inc