Jarett & Sons\'s common stock currently trades at $21.00 a share. It is expected

Question

Jarett & Sons's common stock currently trades at $21.00 a share. It is expected to pay an annual dividend of $1.25 a share at the end of the year (D1 = $1.25), and the constant growth rate is 6% 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. Do not round your intermediate calculations.

b. If the company issued new stock, it would incur a 9% flotation cost. What would be the cost of equity from new stock? Round your answer to two decimal places. Do not round your intermediate calculations.

Explanation / Answer

a.Cost of equity=(Dividend for next period/Current price)+Growth rate

=(1.25/21)+0.06

=11.95%

b.Cost of equity=(Dividend for next period/Current price(1-floatation costs)+Growth rate

1.25/(21(1-0.09)+0.06

=1.25/19.11+0.06

=12.54%

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