Javits & Sons\' common stock currently trades at $23 a share. It is expected to

Question

Javits & Sons' common stock currently trades at $23 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 8% a year.

a. 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.


b. If the company were to issue new stock, it would incur a 11% flotation cost. What would the cost of equity from new stock be? Round your answer to two decimal places.

Explanation / Answer

$23.00 per share X .08% interest per year gives you a $1.84 of interest growth and we will add this to the annual dividend of $3 to give us $4.84 of earnings per share/per year. A. Equity means income in another word. So the income only comes from the saved earnings. So we made $4.84 per share/per year so this is your answer. B. A floatation cost is the insurance that accrues from the cost of new securities. So you would take the cost of the new stock X the .11% flotation cost. Take $23.00 x .11=$2.53 in floatation cost per share. So you make $4.84-2.53= $2.31 profit from each new stock share. $2.31 is your answer.

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