COST OF EQUITY WITH AND WITHOUT FLOTATION Jarett & Sons\'s common stock currentl

Question

COST OF EQUITY WITH AND WITHOUT FLOTATION Jarett & Sons's common stock currently trades at $23.00 a share. It is expected to pay an annual dividend of $1.50 a share at the end of the year (D1 = $1.50), and the constant growth rate is 3% a year. 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.

If the company issued new stock, it would incur a 15% 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

Cost of Equity = D1/ P0 + g

Growth rate = 3%

D1 = 1.50

P0 = 23

Cost of Equity = 1.50/ 23 + 3%

Cost of Equity = 9.52%

Part B

Floatation cost = 15% * 23

Floatation cost = 3.45

Cost of Equity = D1/ (P0 - Floatation Cost) + g

Growth rate = 3%

D1 = 1.50

P0 = 23

Floatation Cost = 3.45

Cost of Equity = 1.50/ (23 - 3.45) + 3%

Cost of Equity = 10.67%

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