Question

Conner Corporation has a common stock price of $35 per share today. The last dividend per share was $3.5 (D0 = $3.5). The long-run growth rate for the company is a constant 8%. If the company issues the new common stock, the net price received by the company is $32.9 per share. What are the company's dividend yield (DY), capital gains yield (CGY), and the percentage flotation cost required to sell the new common stock (F)? a DY = 10.8%; CGY = 8%; F = 9% b DY = 8%; CGY = 10%; F = 6% c DY = 10.8%; CGY = 8%; F = 6% d DY = 10%; CGY = 6%; F = 8%

Answer 1

Given about Conner Corporation,

Common stock price P0 = $35

Last dividend D0 = $3.5

constant growth rate = 8%

If the company issues the new common stock, the net price received by the company is $32.9 per share

So, adjusted price used = $32.90

company's dividend yield = D0*(1+g)/P0 = 3.5*1.08/35 = 10.80%

Flotation cost F= (P0 - adjusted price)/P0 = (35-32.9)/35 = 6%

for a company, its capital gain yield equals its growth rate

So, Capital gain yield = 8%

So, Option c is correct.