Eaver chocolate co. expects to earn $3.50 per share during the current year, its expecteddividend payout ratio is 65%, its expected constant dividend growth rate is 6.0%, and its common stock currently sellsfor $32.50 per share. new stock can be sold to the public at the current price, but a flotation cost of 5% would be incurred. what would be the cost of equity from new common stock

cost of equity  = 13.36  %

Explanation:

given data

earn = $3.50

ratio = 65%

growth rate = 6.0%

common stock currently sells = $32.50

flotation cost = 5%

to find out

cost of equity from new common stock

solution

we get here cost of equity from new common stock that is express as

cost of equity  = + g   ...................1

here D1 is expected dividend  and Po is current price  and g is growth rate and f is flotation cost and

D1 = 3.50 × 0.65

so from equation 1 we get

cost of equity  = + 6%

cost of equity  = 0.1336

cost of equity  = 13.36  %

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