(Common equity-dividend-growth model) A company\'s common stock is currently sel
ID: 2643447 • Letter: #
Question
(Common equity-dividend-growth model) 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 the dividend will grow to $3.30 in 10 years. An investment bank has advised that a new issue could be sold for a flotation cost of 7% of face value. Calculate the annual dividend growth rate forecast for the company. Calculate the dividend anticipated in one year. Calculate investors' required rate of return from the company's common stock. Calculate the company's cost of retained earnings and cost of a new stock issue.Explanation / Answer
Answer:
a. Annual Growth rate(g)
Current Dividend = $1.60
Dividend after 10 years = $3.30
Using Future value formula :
1.60 (1+r)^10 = 3.30
Hence r = 0.075 = 7.50%
b. Dividend anticipated in one year(D1)
Current dividend / (1+g)
=1.60*(1+ 0.075) = $1.72
c. Investor
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