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 $47.00 per share. The growth rate is a constant 12.8%, and the company has an expected dividend yield of 2%. The expected long-run dividend payout ratio is 20%, and the expected return on equity (ROE) is 16%. New stock can be sold to the public at the current price, but a flotation cost of 15% 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

maximum sustainable growth rate g is a "given" at 12.8% and can be confirmed using ROE x (1 - payout ratio) = 0.16 x 0.8 = 0.128

flotation cost = 47 * 0.15 = 7.05

proceeds after flotation cost = 47 - 7.05 = 39.95

(7.05/39.95) + growth rate 0.128 = 0.05263 + 0.12 = 0.3045 or about 30.45%

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