question archive Expected cash dividends are $2
Expected cash dividends are $2
Subject:FinancePrice:2.87 Bought7
Expected cash dividends are $2.00, the dividend yield is 8%, flotation costs are 6% of price, and the growth rate is 2%. Compute the approximate cost of new common stock. (Do not round intermediate calculations. Round your answer to 2 decimal places.)
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Answer:
stock price = expected dividend / dividend yield = $2 / 8% = $25
net proceeds per share = stock price * (1 - flotation cost) = $25 * (1 - 6%) = $23.50
cost of new common stock = (expected dividend / net proceeds per share) + growth rate
cost of new common stock = ($2 / $23.50) + 2%
cost of new common stock = 10.51%
