Weaver Chocolate Co expects to earn 350 per share during the

Weaver Chocolate Co. expects to earn $3.50 per share during the current year, its expected dividend payout ratio is 65%, its expected constant dividend growth rate is 6.0%, and its common stock currently sells for $30.00 per share. 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 equity from new common stock? Do not round your intermediate calculations.

Solution

Option A 13.98%

Cost of New Equity = [D1 / Price * (1 - F) ] + G

D1 = Expected dividend in Year 1

Price = Current Price

F = Floatation Cost

G = Growth Rate

Cost of New Equity = [D1 / Price * (1 - F) ] + G

Cost of New Equity = [$3.50 * 0.65 / 30 * (1 - 0.05) ] + 0.06

Cost of New Equity = [$2.275 / $28.5 ] + 0.06

Cost of New Equity = 0.0798 + 0.06 = 0.1398 or 13.98%