Cost of common equity

Business & Finance
Tutor: None Selected Time limit: 1 Day

Calculate the cost of new common equity financing of stock Q using Gordon Model

Round the answers to two decimal places in percentage form (Write the percentage sign in the "units" box)

Last Year Dividend

Growth Rate of Dividends

Selling Price of Stock

Floatation Costs

Cost of Common Equity

Stock Q

$4.89

1%

$35.37

$3.01

?

 

Sep 25th, 2015

Thank you for the opportunity to help you with your question!

Let us assume 

G: Growth Rate of Dividends

D: Next year's Dividend

S: Selling price of stock

K: Cost of Common Equity

As we know that the next year dividend will be = (G/100)*(Present Dividend)+(Present Dividend)=1.01*$4.89

According to Gordon Model:

K = (D/S)+G = (1.01*$4.89/$35.37)+.01 =0.1354

Hence K = .1354 * 100% = 13.54%

Please let me know if you need any clarification. I'm always happy to answer your questions.
Sep 25th, 2015

Thank you for your help. Do you think you can help me with the other problems I've posted as well? I would appreciate it. 

Sep 25th, 2015

Dear Friend,

I love to answer queries posted by you.

Sep 25th, 2015

Given the following information on Big Brothers, Inc. capital structure, compute the company’s weighted average cost of capital (WACC). The company’s marginal tax rate is 40%.

Round the answer to two decimal places in percentage form. 

Type of CapitalPercent of Capital StructureBefore-Tax Component Cost
Bonds41%13.46%
Preferred Stock14%15.89%
Common StockPlease calculate it17.73%


Sep 25th, 2015

Great Seneca Inc. sells $100 million worth of 25-year to maturity 13.76% annual coupon bonds. The net proceeds (proceeds after flotation costs) are $992 for each $1,000 bond. The firm's marginal tax rate is 30%. What is the after-tax cost of capital for this debt financing?

Round the answer to two decimal places in percentage form. 


Sep 25th, 2015

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