question archive Hannibal's Restaurants expects to pay a common stock dividend of $4
Hannibal's Restaurants expects to pay a common stock dividend of $4
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Hannibal's Restaurants expects to pay a common stock dividend of $4.35 per share next year. Dividends are expected to grow at a 3 percent rate for the foreseeable future. Hannibal's common stock is selling for $30 per share, and issuance costs are $4.25 per share.
a. What is Hannibal's cost of internal equity?
b. What is Hannibal's cost of external equity?
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A. Cost of Retained Earnings (Internal Equity) - Issuance costs is not relevant since the funds were coming fro. Retained Earnings. You don't have to issue shares thus no issuance costs.
= (Dividends/Market Price) + Growth Rate
(4.35/30) + 3%
= 14.5%+3%
= 17.5 %
B. Issuance costs is relevant since you have to issue shares already here. It is deducted since for every issuance of stocks, the issue price net of issuance costs are ultimately what you receive.
= (4.35/(30-4.25)) + 3%
= 16.89%+3%
= 19.89%
