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 $32.50 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?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 $32.50 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?

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adnansoomro2019 adnansoomro2019 · Answer 1 · 2020-05-02T05:10:19+02:00

Answer:

Cost of Equity = 13.36%

Explanation:

Cost of Equity is required = ??

Discounted Dividend Model or DDM model can be used to calculate cost of equity from new common stock.

Before starting to solve, let's find out what have been given already:

Earnings = 3.50 USD

Payout Ratio = 65%

G = Growth Rate = 6.0%

F = Flotation Cost = 5%

P = Current Share Price = 32.50 USD

First Step is to find out the expected dividend.

Dividend = Expected Earning x Payout Ratio

Dividend = 3.50 x 65%

D = Dividend = 2.275 USD

So, now we have everything on board, let's find out cost of equity.

Cost of Equity = [tex]\frac{D}{P(1-F)}[/tex] + G

Cost of Equity = [tex]\frac{2.275}{32.50(1-0.05)}[/tex] + 0.06

Cost of Equity = 13.36%