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 longminusterm growth in dividends is projected to be 8 percent indefinitely

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Business

Gianni Fox

12 May, 00:15

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 longminusterm growth in dividends is projected to be 8 percent indefinitely

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Elisa Wilson · Answer 1

B13%, explained below:

Explanation:

Flotaion cost doesn't impact the cost of existing equity and it only impact the cost of new equity. The question asks about cost of existing equity, hence

Cost of equity = { Expected dividend in one year / Stock price} + growth rate = 3 / 60% + 8%

Cost of existing equity (Retained earnings) = 13%