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LePage Co. expects to earn $2.50 per share during the current year, its expected dividend payout...

LePage Co. expects to earn $2.50 per share during the current year, its expected dividend payout ratio is 65%, its expected constant dividend growth rate is 6.0%, and its common stock currently sells for $24.75 per share. New stock can be sold to the public at the current price, but a flotation cost of 9% would be incurred. What would be the cost of equity from new common stock?

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Answer #1

P0 price needs to be adjusted for floatation cost,

P0 = $24.75 * (1 - 9%) = $22.5225

Div1 = Earnings per share * Dividend payout ratio = $2.50 * 6% = $1.50

r - 0.06 = 1.50/22.5225

r - 0.06 = 0.0666

Cost of Equity, r = 12.66%

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