Question

Messman Manufacturing will issue common stock to the public for $35. The expected dividend and the growth in dividends are $2.00 per share and 5%, respectively. If the flotation cost is 9% of the issue's gross proceeds, what is the cost of external equity, r_e? Round your answer to two decimal places.

  

Answer 1

Given,

Share price = $35

Expected dividend = $2

Growth rate = 5% or 0.05

Flotation cost (f) = 9% on 0.09

Solution :-

Cost of external equity

= [Expected dividend {share price x (1 - f)}] + growth rate

= [$2 {$35 x (1 - 0.09)}] + 0.05

= [$2 {$35 x 0.91}] + 0.05

= [$2 $31.85] + 0.05

= 0.0628 + 0.05

= 0.1128 or 11.28%