Problem Walk-Through COST OF EQUITY WITH AND WITHOUT FLOTATION Jarett & Sons\'s

Question

Problem Walk-Through COST OF EQUITY WITH AND WITHOUT FLOTATION Jarett & Sons's common stock currently trades at $39.00 a share. It is expected to pay an annual dividend of $3.00 a share at the end of the year (D1 = $3.00), and the constant growth rate is 5% 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)

b)

Cost of common equity (r) D1÷P0+g Here, Stock price (P0) $              39.00 Expected dividend (D1) $                3.00 Growth rate (g) 5.00% Cost of common equity (r) 12.69% $5/$39+3%

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