Banyan Co.’s common stock currently sells for $39.75 per share. The growth rate is a constant 9.1%, and the company has an expected dividend yield of 4%. The expected long-run dividend payout ratio is 35%, and the expected return on equity (ROE) is 14%. New stock can be sold to the public at the current price, but a flotation cost of 10% would be incurred. What would be the cost of new equity? Round your answer to two decimal places. Do not round your intermediate calculations.
Calculate the expected dividend as follows:
Dividend yield = Expected dividend / Current share price
4% = Expected dividend / $39.75
Expected dividend = $39.75 * 4%
Expected dividend = $1.59
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Calculate the cost of new equity as follows:
Cost of new equity = (Expected dividend / Current price*(1-Flotation cost)) + Growth rate
Cost of new equity = ($1.59 / (39.75*(1-10%))) + 9.1%
Cost of new equity = 13.54%
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