question archive Sullivan & Associates expects to pay a common stock dividend of $2
Sullivan & Associates expects to pay a common stock dividend of $2
Subject:AccountingPrice:2.86 Bought7
Sullivan & Associates expects to pay a common stock dividend of $2.00 per share next year. Dividends are expected to grow at a 5 percent rate for the foreseeable future. Sullivan's common stock is selling for $20 per share, and issuance costs are $3.00 per share.
a. What is Sullivan's cost of internal equity?
b. What is Sullivan's cost of external equity?
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Cost of internal equity=15%
Cost of external equity =16.76%
Step-by-step explanation
Cost of internal equity= Expected dividend/Current price+ growth rate
= 2/20+ 5%
=10%+5%
=15%
Cost of external equity will consider the stock price after flotation cost
= Expected dividend/Current price after flotation+ growth rate
= 2/(20-3)+ 5%
=0.1176470588+ 0.05
=0.1676470588
=16.76%
