Oval Inc. just paid a dividend equal to $1.50 per share on its common stock, and it expects this dividend to grow by 4 percent per year indefinitely. The firm plans to issue common stock, which has a $16 per share market price, to raise funds to support operations. Oval's investment bankers estimate that the flotation costs for new issues of common stock will be equal to 8 percent of the issue (market) price. What is Oval's cost of new common equity, re? a. 13.38%b. 10.60%c. 8.76%d. 18.55%e. 14.60%

Question

Business

Gidget

31 July, 01:38

Oval Inc. just paid a dividend equal to $1.50 per share on its common stock, and it expects this dividend to grow by 4 percent per year indefinitely. The firm plans to issue common stock, which has a $16 per share market price, to raise funds to support operations. Oval's investment bankers estimate that the flotation costs for new issues of common stock will be equal to 8 percent of the issue (market) price. What is Oval's cost of new common equity, re? a. 13.38%b. 10.60%c. 8.76%d. 18.55%e. 14.60%

+3

Answers (1)

Know the Answer?

Lina Hardin · Answer 1

e. 14.60%

Explanation:

The computation of Oval's cost of new common equity is shown below:-

Price of stock = Estimated dividends for next period : (Required rate of return - Growth rate)

Dividend = $1.50 * (1 + 4%)

= $1.56

Price of stock would be the price net of flotation cost

= $16 * (1 - 8%)

= $14.72

Required rate of return

= (1.56 : 14.72) + 0.04

= 14.60%