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Weaver Chocolate Co. expects to earn $3.50 per share during the current year , its expected Dividend Payout ratio is 65.0% , 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, F , of 5.0% would be incurred. What would be the cost of Equity for the new Common Stock

Respuesta :

Answer:

13.37%

Explanation:

The computation of the cost of the equity for the new common stock is shown below:

Cost of equity  = Dividend ÷ Price × (1 - Flotation cost) + growth rate

where,

Dividend = Earning per share × Dividend Payout ratio

= $3.50 × 65%

= $2.275

And, the other items would remain the same

So, the cost of equity is

= $2.275 ÷ $32.50 × (1 - 5%) + 6%

After solving this, the cost of equity is 13.37%

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