COST OF COMMON EQUITY WITH FLOTATION Banyan Co.’s common stock currently sells f

Question

COST OF COMMON EQUITY WITH FLOTATION Banyan Co.’s common stock currently sells for $40.75 per share. The growth rate is a constant 9.6%, and the company has an expected dividend yield of 6%. The expected long-run dividend payout ratio is 20%, and the expected return on equity (ROE) is 12%. New stock can be sold to the public at the current price, but a flotation cost of 10% would be incurred. What would be the cost of new equity? Round your answer to two decimal places. Do not round your intermediate calculations. %

Explanation / Answer

Cost of new common stock ( r) D1÷[P0×(1-F)]+g Here, Stock price (P0) $                                              40.75 Expected dividend (D1) $                                                2.45 40.75*6% Flotation cost (F) 10.00% Growth rate (g) 10% 12%*(1-20%) Cost of new common stock ( r) 16.27% 2.45/(40.75*(1-10%))+10%

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