Weaver Chocolate Co. expects to earn $3.50 per share during the current year, its expected dividend payout ratio is 65%, its expected constant dividend growth rate is 6.0%, and its common stock currently sells for $32.50 per share. New stock can be sold to the public at the current price, but a flotation cost of 5% would be incurred. What would be the cost of equity from new common stock? Select one: a. 12.70% b. 13.37% c. 14.04% d. 14.74% e. 15.48%

Question

Business

Alicia Reilly

3 July, 10:16

Weaver Chocolate Co. expects to earn $3.50 per share during the current year, its expected dividend payout ratio is 65%, its expected constant dividend growth rate is 6.0%, and its common stock currently sells for $32.50 per share. New stock can be sold to the public at the current price, but a flotation cost of 5% would be incurred. What would be the cost of equity from new common stock? Select one: a. 12.70% b. 13.37% c. 14.04% d. 14.74% e. 15.48%

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Answers (1)

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Sonia Petty · Answer 1

Option (B) is correct.

Explanation:

Expected EPS1 = $3.50

Payout ratio = 65%

Expected dividend,

D1 = EPS * Payout ratio

= $3.50 * 65%

= $2.275

Current stock price = $32.50

Expected constant dividend growth rate, g = 6.00%

Flotation cost, F = 5.00%

Therefore, the Cost of equity from new common stock:

= D1 : [P0 * (1 - F) ] + g

= $2.275 : [$32.50 * (1 - 0.05) ] + 0.06

= 0.07368 + 0.06

= 0.0737 + 0.06

= 0.1337

= 13.37%