Suppose that Brown-Murphies’ common shares sell for $21.00 per share, that the f

Question

Suppose that Brown-Murphies’ common shares sell for $21.00 per share, that the firm is expected to set their next annual dividend at $0.63 per share, and that all future dividends are expected to grow by 4 percent per year, indefinitely. Assume Brown-Murphies faces a flotation cost of 14 percent on new equity issues.

What will be the flotation-adjusted cost of equity? (Round your answer to 2 decimal places.)

Suppose that Brown-Murphies’ common shares sell for $21.00 per share, that the firm is expected to set their next annual dividend at $0.63 per share, and that all future dividends are expected to grow by 4 percent per year, indefinitely. Assume Brown-Murphies faces a flotation cost of 14 percent on new equity issues.

Explanation / Answer

Cost of Equity = 7.49%

Next Year Dividend (D1) = $0.63 per share

Current Share Price (P0) = $21 per share

Growth Rate (g) = 4%

Flotation Cost (Fc) = 14%

Flotation-adjusted cost of equity = [ D1 / Po ( 1 – Fc ) ] + g

= [ $0.63 / $21 ( 1 – 0.14 ) ] + 0.04

= [ $0.63 / $18.06 ] + 4%

= 3.49% + 4%

= 7.49%

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