Jarett & Sons\'s common stock currently trades at $37.00 a share. It is expected

Question

Jarett & Sons's common stock currently trades at $37.00 a share. It is expected to pay an annual dividend of $2.00 a share at the end of the year (D1 = $2.00), and the constant growth rate is 7% 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 11% 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

1) Re = D1/P0 + g

= $2.00/$37 + 0.07

= 0.1241 or 12.41%

2) Floatation Costs = $37 × 11% = $4.07

Re = D1/(P0 - Floatation Costs) + g

= $2/($37 - $4.07) + 0.07

= 0.1307 or 13.07%

Related Questions

Navigate

• Browse (All)
• Browse J
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.