Vance Communications wants you to calculate its cost of common stock. During the
ID: 2696726 • Letter: V
Question
Vance Communications wants you to calculate its cost of common stock. During the next 12 months, the company expects to pay dividends (D1) of $1.20 per share, and the current price of its common stock is $30 per share. The expected growth rate is 9%.
A) Compute the cost of retained earnings (Ke). Using this formula: Ke(Cost of common equity in the form of retained earnings).
= D1 / P0 + g
B) If a $2 floatation cost is involved, compute the cost of the new common stock (Kn). Use this formula:
= Ke= D1 / P0 + g
=Kn= D1 / Po - F + g
Explanation / Answer
A)
Ke= (1.2/30)+.09
Ke= .04+.09
Ke= .13 or 13%
B) Ke= (1.2/(30-2))+.09
Ke= 1.2/28+.09
Ke= .0429+.09
K= .13285 or 13.29%
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