Question

P & B manufacturers paid the following dividends during the last years:

2019 $1.26

2018 $1.17

2017 $1.08

2016 $1.00

P & B expects next year dividends will growth at the same rate. P & B expects to issue new common stocks at $40. The investment bank will charge a cost of 3% per share for issuing and selling the stocks.

Calculate the growth rate in dividends and the cost of new common stocks

Answer 1

Solution:-

To Calculate Growth Rate-

Current year DPS = Base year DPS *

$1.26 = $1 *

$1.26 =

= 1 + G

- 1 = G

G = 1.0595 - 1

G = 5.95%

Hence, Growth Rate is 5.95%.

DPS2021 = DPS2020 * (1+G)

DPS2021 = $1.26 * (1+0.0595)

DPS2021 = $1.335

To Calculate Cost of New Stock-

Net Proceeds = 40 * (1-0.03) = $38.80

Cost of New Stock =

Cost of New Stock =

Cost of New Stock = 9.39%

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