Question

Jumble will issue new common stock to finance an expansion. The existing common stock just paid a $1.50 dividend, and dividends are expected to grow at a constant rate 8% indefinitely. The stock sells for $45, and flotation expenses of $2.25 will be incurred on new shares. What is the cost of new common stock be for Jumble Corp.

Answer 1

11.79%

Step-by-step explanation:

The computation of the cost of the new common stock is given below:

As we know that

The Cost of New common Stock is

= [Expected Dividend ÷ (Price - Floatation cost)] + growth rate

where,

Expected Dividend is

= Current Divided × (1 +Growth rate)

= $1.5 × (1 +0.08)

= $1.62

Now cost of new common stock is

= [$1.62 ÷ ($45 - $2.25)] + 0.08

= ($1.62 ÷ $42.75) + 0.08

= 0.1179

= 11.79%