Question

Jiffy Co. expects to pay a dividend of $3.00 per share in one year. The current price of Jiffy common stock is $60 per share. Flotation costs are $3.00 per share when Jiffy issues new stock. What is the cost of internal common equity (retained earnings) if the long-term growth in dividends is projected to be 8 percent indefinitely? Select one:

a. 14 percent
b. 13 percent
c. 15 percent
d. 16 percent

Answer 1

b. 13 percent

Step-by-step explanation:

For computing the cost of internal common equity, we need to apply the formula which is shown below:

= (Expected dividend in one-year ÷ current price per share of common stock) + expected Growth rate

= ($3 ÷ $60) + 8%

= 5% + 8%

= 13%

We simply divide the expected dividend by current price and then add the growth rate to find out the cost of internal common equity

The flotation cost would not be impacted. Hence, we ignored it.