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    Compute Individual or component costs of capital

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    (Individual or component costs of capital) Compute the cost of the following:

    b. A new common stock issue that paid a $1.05 dividend last year. The par value of the stock is $2, and the earnings per share have grown at a rate of 4 percent per year. This growth rate is expected to continue into the foreseeable future. The company maintains a constant dividend-earnings ratio of 40 percent. The price of this stock is now $30, but 9 percent flotation costs are anticipated.

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    Solution Summary

    The solution computes the cost of a new common stock issue (see Excel file).

    $2.19