Banyan co.’s common stock currently sells for $53.25 per share. the growth rate is a constant 8%, and the company has an expected dividend yield of 2%. the expected long-run dividend payout ratio is 20%, and the expected return on equity (roe) is 10.0%. new stock can be sold to the public at the current price, but a flotation cost of 15% would be incurred. what would be the cost of new equity? do not round intermediate calculations. round your answer to two decimal places.

Cost of New Equity () = 20.75%

Explanation:

Banyan Company’s common stock currently sells() = $53.25

Growth rate is constant (g) = 8%

Expected dividend yield = 2%

Expected long-run dividend payout ratio = 20%

Expected return on equity (ROE) = 10%

Flotation cost(F) = 15%

We know that ;

Growth rate = (1-Dividend payout ratio) (ROE)

8% = (1-0.20)(0.10)

Cost of new equity (ke) =

where;

F   = Flotation cost

() = Expected Dividend

() = Current Stock price

g = Dividend growth rate

Calculating expected dividend:

Dividend yield =  

15% =

= 15% 53.25

Expected Dividend () = $7.9875

Cost of New Equity () =

                                       =

                                       = 0.207 (or) 20.75%

Cost of New Equity () = 20.75%

Actually Investors required rate of return i.e. ROE = 10% on the stock, but because of flotation costs the company must earn more than 10%.

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