Question
Jarett & Sons's common stock currently trades at $35.00 a share. It is expected to pay...
Jarett & Sons's common stock currently trades at $35.00 a share. It is expected to pay an annual dividend of $1.75 a share at the end of the year (D1 = $1.75), and the constant growth rate is 3% a year. a. What is the company's cost of common equity if all of its equity comes from retained earnings? Do not round intermediate calculations. Round your answer to two decimal places. % b. If the company issued new stock, it would incur an 11% flotation cost. What would be the cost of equity from new stock? Do not round intermediate calculations. Round your answer to two decimal places.
Answers
a. Company's cost of common equity
b. Cost of equity from new stock
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Dividend Payable Costof commonequity = 7 -+Growthr ateof dividend Current Market Price$1.75 Costof commonequity = to +3%Costof commonequity = 8%Dividend Costof commonequity = 7 +DividendGrowth Rate Issue Price(1 - Flotation Cost)$1.75 Costof commonequity = $35(1 - 11%) +3% 1-11%Costof commonequity = 8.62%
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