COST OF COMMON EQUITY WITH FLOTATION Banyan Co.\'s common stock currently sells

Question

COST OF COMMON EQUITY WITH FLOTATION Banyan Co.'s common stock currently sells for $43.00 per share. The growth rate is a constant 11.2%, and the company has an expected dividend yield of 5%. The expected long-run dividend payout ratio is 20%, and the expected return on equity (ROE) is 14%. New stock can be sold to the public at the current price, but a flotation cost of 5% 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

Expected Dividend, D1 = Dividend Yield x Stock Price = 5% x 43 = $2.15

=> Cost of new equity = D1 / P x (1 - f) + g

= 2.15 / 43 x (1 - 5%) + 11.2%

= 16.46%

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