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Alpha Moose Transporters has a current stock price of $33.35 per share, and is expected to pay a per-share dividend of $1.36 at the end of next year. The company’s earnings’ and dividends’ growth rate are expected to grow at the constant rate of 8.70% into the foreseeable future. If Alpha Moose expects to incur flotation costs of 5.00% of the value of its newly-raised equity funds, then the flotation-adjusted (net) cost of its new common stock (rounded to two decimal places) should be

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Answer:

Alpha Moose Transporters

If Alpha Moose expects to incur flotation costs of 5.00% of the value of its newly-raised equity funds, then the flotation-adjusted (net) cost of its new common stock (rounded to two decimal places) should be:

= $30.84.

Explanation:

a) Data and Calculations:

Current stock price = $33.35 per share

Dividend per share = $1.36

Flotation costs =  5.00%

Flotation-adjusted stock price = $31.68 ($33.35 * 0.95)

Expected dividend growth rate = 8.70%

Expected rate of returns = 4.29% ($1.36/$31.68 * 100)

Cost of new common stock = Dividend per share/(Expected rate of returns - Dividend growth rate)

= $1.36/(0.0429 - 0.087)

= $1.36/0.0441

= $30.84

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