Question

Weaver Chocolate Co. expects to pay a $2.275 dividend in the upcoming year, its expected constant...

Weaver Chocolate Co. expects to pay a $2.275 dividend in the upcoming year, 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. 15.48%
B. 14.74%
C. 12.70%
D. 13.37%
E. 14.04%
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Answer #1

ANSWER = D. 13.37%

D1 = Expected dividend = $2.275

P0 = Current stock price = $32.50

g = Growth rate = 6%

f = Flotation cost = 5%

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2.275 Cost of equity = 32.50(1 – 0.05) + 6

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