Jarett & Sons\'s common stock currently trades at $25.00 a share. It is expected

Question

Jarett & Sons's common stock currently trades at $25.00 a share. It is expected to pay an annual dividend of $3.00 a share at the end of the year (D1 = $3.00), and the constant growth rate is 6% 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.

Explanation / Answer

a.cost of common equity from retained earnings=(D1/Current price)+Growth rate

=(3/25)+0.06

=18%

b.cost of common equity from new stock=(D1/Current price(1-floatation cost)+Growth rate

=(3/25(1-0.2))+0.06

=(3/20)+0.06

=21%

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