Jarett & Sons's common stock currently trades at $26.00 a share. It is expected to pay an annual dividend of $2.25 a share at the end of the year (D1 = $2.25), and the constant growth rate is 5% a year.
What is the company's cost of common equity if all of its equity comes from retained earnings? Round your answer to two decimal places. Do not round your intermediate calculations. %
If the company issued new stock, it would incur a 20% flotation cost. What would be the cost of equity from new stock? Round your answer to two decimal places. Do not round your intermediate calculations. %
a) Calculation of cost of common stock: |
D1= $2.25 |
Growth= 5% |
Price= $26 |
Price= D1/(required return-growth) |
26=2.25/(required return-0.05) |
required return-0.05= 0.0865 |
Required return=0.1365 |
Cost of equity= 13.65% |
b)Calculation of cost of equity:: |
D1= $2.25 |
Growth= 5% |
Price= $26*(1-0.2)= 26*0.8= $20.8 |
Price= D1/(required return-growth) |
20.80=2.25/(required return-0.05) |
required return-0.05=0.1082 |
Required return=0.1582 |
Cost of equity= 15.82% |
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