Pepper Inc.'s common stock currently sells for $15.00 per share, the company expects to pay $1.925 dividend in the coming year and it expects the dividend to grow at a constant growth rate of 6.00%. New stock can be sold to the public at the current price, but a flotation cost of 8% would be incurred. By how much would the cost of new stock exceed the cost of retained earnings? Do not round your intermediate calculations. Hint: Re-Rs

Question

Business

Monserrat Best

12 August, 07:56

Pepper Inc.'s common stock currently sells for $15.00 per share, the company expects to pay $1.925 dividend in the coming year and it expects the dividend to grow at a constant growth rate of 6.00%. New stock can be sold to the public at the current price, but a flotation cost of 8% would be incurred. By how much would the cost of new stock exceed the cost of retained earnings? Do not round your intermediate calculations. Hint: Re-Rs

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Answers (1)

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Eli Combs · Answer 1

The correct answer is 0.78%.

Explanation:

According to the scenario, the computation of the given data are as follows:

First we calculate the retained earning cost, then

Cost of retained earning = Dividend : Price + Growth

= (1.925 * 70%) : 15 + 6%

= 1.3475 : 15 + 0.06

= 0.1498 or 14.98%

Now, Cost of equity = (Dividend : Price (1 - Flotation cost) + Growth

= (1.925 * 70%) : 15 (1 - 0.08) + 0.06

= (1.3475 : 13.8) + 0.06

= 0.1576 or 15.76%

So, Exceed amount = 15.76% - 14.98% = 0.78%