ssignment Module 5 Homework Am pro t Score 000 Save Submit A

ssignment: Module 5 Homework Am pro t Score: 0.00% Save Submit Assignment for Grading Questions Problem 10.1 Question 8 of 20 Check My Work (3 remaining) O Click here to read the eBook: Cost of New Common Stock, re COST OF COMMON EQUITY WITH FLOTATION Banyan Co.\'s common stock currently sells for $42.50 per share. The growth rate is a constant 12.6%, and the company has an expected dividend yield of 2%. The expected long-run dividend payout ratio is 30%, and the expected return on equity (ROE) is 18%. o O 11. 12. 13. New stock can be sold to the public at the current price, but a flotation cost of 15% would O be incurred. What would be the cost of new equity? Round your answer to two decimal O places. Do not round your intermediate calculations 15. 16. 17 18. Check My Work (3 remaining) 988 #2 FS F6 2 4 6

Solution

Growth = ( 1= Divdend Payout)* ROE = 0.7 * 18% = 12.6%
Flotation cost = 15%

Expected Dividend = Dividend Yield * Price per share = 2% * 42.50 = 0.02 * 42.50 = 0.85(D1)

Cost of equity = [D1/(Price*(1-flotation rate)] + growth = 0.85/(42.50*(1-15%)] + 12.6% = 14.95%


Please discuss before rating
Best of Luck. God Bless