A c ompany\'s common stock dividends have grown over the past 5-year period from

Question

A company's common stock dividends have grown over the past 5-year period from $0.60 per share to $0.89 (today). Assume that dividends are expected to grow at this rate for the foreseeable future. The company

A company's common stock dividends have grown over the past 5-year period from $0.60 per share to $0.89 (today). Assume that dividends are expected to grow at this rate for the foreseeable future. The company's stock is currently selling for $12 per share. New common stock can be sold to net the company $11 per share. Determine the costs of internal and external equity for this firm.

Explanation / Answer

LET GROWTH RATE BE g

0.6(1+g)^5 =0.89

g = 8.21%

therefore D1= 0.89(1.0821)

=0.96

cost of internal equity =

P0=D1/(Re-g)

11=0.96/(Re-0.821)

Re = 9.08%

cost of external equity

12 = 0.96/(Re-0.821)

Re=9.01%

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