Question

Yasheen Company expects to earn $3.50 per share during the current year, its expected dividend payout ratio is 66%, its expected constant dividend growth rate is 6.0%, and its common stock currently sells for $32.50 per share. New stock can be sold to the public at the current price, but a flotation cost of 5% would be incurred. What would be the cost of equity from new common stock? a. 13.37% b. 13.70% c. 13.98% d. 13.74% e. 13.48%

Answer 1

Stock price=	Expected dividend/(Cost of equity - growth rate)
expected earnings	3.50
Dividend pay ratio	66%
Expected Dividend	3.5*66%
Expected Dividend	2.31
Growth rate	6%
Share price	32.5
Stock price=	Expected dividend/(Cost of equity - growth rate)
32.50=	2.31/(Cost - 6%)
(Cost - 6%)	2.31/32.50
(Cost - 6%)	0.071077
Cost	7.10% + 6%
Cost	13.10%
Cost of new equity	13.10/(100-5)
Cost of new equity	0.137976
Cost of new equity	13.7976%