Bouchard Company's stock sells for $20 per share, its last dividend (D0) was $1.00, its growth rate is a constant 6 percent, and the company would incur a flotation cost of 20 percent if it sold new common stock. Which of the following is the cost of issuing new common stock? (Round off the answer to two decimal places.) a. 12.63 percentb. 11.96 percentc. 10.24 percent

Question

Business

Kassandra Barber

2 May, 08:18

Bouchard Company's stock sells for $20 per share, its last dividend (D0) was $1.00, its growth rate is a constant 6 percent, and the company would incur a flotation cost of 20 percent if it sold new common stock. Which of the following is the cost of issuing new common stock? (Round off the answer to two decimal places.) a. 12.63 percentb. 11.96 percentc. 10.24 percent

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Answers (1)

Know the Answer?

Raelynn Bolton · Answer 1

Option (A) is correct.

Explanation:

Given that,

Flotation cost, FC = 20 percent

Dividend growth rate, g = 6%

Share price, P = $20

Dividend in the next year, D1:

= 1 * 0.06

= 0.06

Cost of new equity:

= D1 : [P * (1 - FC) ] + g

= 1.06 : [20 * (1 - 0.20) ] + 0.06

= 1.06 : (20 * 0.8) + 0.06

= 1.06 : (16) + 0.06

= 0.06625 + 0.06

= 0.12625 or 12.63%