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25 November, 19:11

Weaver Chocolate Co. expects to earn $3.50 per share during the current year, its expected Dividend Payout ratio is 65.0%, its expected constant Dividend growth rate is 6.0%, and its Common Stock currently sells for $32.50 per share. New Stock can be sold to the public at the current Price, but a Flotation cost, F, of 5.0% would be incurred. What would be the cost of Equity for the new Common Stock

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  1. 25 November, 20:29
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    13.37%

    Explanation:

    The computation of the cost of the equity for the new common stock is shown below:

    Cost of equity = Dividend : Price * (1 - Flotation cost) + growth rate

    where,

    Dividend = Earning per share * Dividend Payout ratio

    = $3.50 * 65%

    = $2.275

    And, the other items would remain the same

    So, the cost of equity is

    = $2.275 : $32.50 * (1 - 5%) + 6%

    After solving this, the cost of equity is 13.37%
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