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Cost of Equity with Flotation Costs

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14. 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 $57.50 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?
9.76%
11.08%
10.16%
9.86%
11.96%

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Solution Summary

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 $57.50 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?
9.76%
11.08%
10.16%
9.86%
11.96%

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The Gordon Dividend Growth Model states that Price of stock=Next dividend/(required rate of return-growth rate). We can restate this formula to account for flotation costs thus: Required rate of ...

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