Javits & Sons\' common stock currently trades at $37 a share. It is expected to

Question

Javits & Sons' common stock currently trades at $37 a share. It is expected to pay an annual dividend of $2.25 a share at the end of the year (D1 = $2.25), and the constant growth rate is 3% 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 10% flotation cost. What would the cost of equity from new stock be? Round your answer to two decimal places.
%

Explanation / Answer

a. Cost of common equity = Dividend next year / Current price + Growth rate = 2.25/37 + 0.03 = 9.1% b. Including a flotation cost of 10%, price of stock = 37*(1-0.1) = $33.30 Cost of equity of new stock = 2.25/33.30 + 0.03 = 9.8%

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