Megah Berhad has an anticipated dividend next year is RM0.80 per share, its growth rate

is 5% per year, and its existing common stock is selling for RM10.00 per share. New shares

of stocks can be sold to the public for the same price. The company must pay its investment

bankers 4% of the stock's selling price, or RM0.40 per share. What is the expected rate of

return on new common stock? Briefly explain your answers.

Overall Rate = 12.10%/(1-4%)

= 12.60%

the answer is inclusive of both the rate required rate of return and bank's commission per share.

Step-by-step explanation

Stock Price = Dividend/(1+r)^1/(r-g)

Where

Stock Price = RM10.00

Dividend = RM0.8

g = 5%

r = ?

10 = 0.8/(1+r)^1/(r-5%)

10*(r-5%) = 0.8/(1+r)

10r-0.5 = 0.8/(1+r)

(10r-0.5) (1+r) = 0.8

10r-0.5+10r²+0.5r = 0.8

10r² +10.5r - 0.5-0.8 = 0

10r² +10.5r-1.3 = 0

Using the standard form; aX² + bX + C = 0

r =[-b +/- √(b² - 4ac)]/2a

r = -10.5 +/- √[10.5²-4(10)(-1.3)]/2*(10)

= 12.10%

Overall Rate = 12.10%/(1-4%)

= 12.60%