Question

Asian Trading Company paid a dividend yesterday of $4 per share. The dividend is expected to grow at a constant rate of 7% per year. The price of Asian Trading Company's stock today is $25 per share. If Asian Trading Company decides to issue new common stock, flotation costs will equal $3 per share. Asian Trading Company's marginal tax rate is 35%. Based on the above information, the cost of new common stock is

Answer 1

$26.45

Step-by-step explanation:

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

Cost of the new common stock is

= Current year dividend ÷ (Price - flotation cost) + growth rate

where,

Current year dividend is

= $4 × 1.07

= $4.28

And, the price $25 and the flotation cost is $3

And, the growth rate is 7%

So the cost of new common stock is

= ($4.28) ÷ ($22) + 0.07

= $26.45

We simply applied the above formula