A company\'s common stock is currently selling for $24.00 per share. The company

Question

A company's common stock is currently selling for $24.00 per share. The company recently paid an annual dividend of $1.60 per share, and investors forecast that ividend wiil grow to $3.30 in 10 years. An investment bank has advised that new issue could be sold for a floating cost of 7% of face value.

a) Calculate the anual dividend growth rate forecast for company

b)~~~~~~~ the dividend anticipated in opne year

c)~~~~~~~ investors required rate of return from the company's common stock

d)~~~~~~~~   cost of retained earnings and cost of a new stock issue

Explanation / Answer

a)Growth Rate (g) = (3.3/1.6)^(1/10) - 1 = 7.51%

b)D1 = 1.6*(1+7.51%) = 1.72

c) As per gordn growth method: P = D1/(r-g) = 24

r-g = 1.72/24 = 7.17%

r = 7.17% + 7.51% = 14.67%

F = Flotation cost

d) Cost of retained earning = 14.67% (required rate of return)

Cost of a new stock issue = D1/(P*(1-F)) + g

= 1.72/(24*(1-7%)) + 7.51% = 15.21%

Please note: I have used actual nos. instead of rounded off nos., t=so the end result is a bit different than if you round off at each step

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