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A certain company has issued common shares worth $ 10,000,000. Such issuance originated total expenses of...

A certain company has issued common shares worth $ 10,000,000. Such issuance originated total expenses of the order of $ 600,000. This company expects to distribute $ 1,800,000 in dividends in the first year, which are expected to grow at an annual rate of 8%. If the tax rate is 50%, and the annual average inflation in the coming years is 18%, what is the cost that this issue of common shares represents for the company?
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Answer #1

Solution :- Net proceeds from issue of common shares = Issue value of common shares - Total expenses incurred.

= 10000000 - 600000

= $ 9400000.

Cost of issue of common shares = (Expected dividend / Net proceeds from common shares issue) + Growth in dividends.

= (1800000 / 9400000) + 0.08

= 0.1915 + 0.08

= 0.2715 i.e., 27.15 %

Net (real) cost of issue of common shares (excluding inflation effect) = 27.15 % - 18 %

= 9.15 %

Conclusion :- Cost of issuing common shares = 9.15 % (approx).

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