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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%

Respuesta :

Answer:

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%

According to equation, the cost of equity from new common stock include option B: 13.37%.

What is the term Cost of Equity about?

Cost of equity is defined as the return that a particular person needs for an equity investment. This can be calculated by weighted average cost of capital.

Given Information:-

Expected EPS1 = $3.50

Payout ratio = 65%

Common stock price=$32.50 per share

Then, Expected dividend,

D1 = EPS × Payout ratio

D1 = $3.50  × 65%

D1 = $2.275

Expected constant dividend growth rate, g = 6.00%

Flotation cost, F = 5.00%

Therefore, the Cost of equity from new common stock:

Cost of equity= D1 ÷ [P0 × (1 - F)] + g

Cost of equity= $2.275  ÷ [$32.50 × (1 - 0.05)] + 0.06

Cost of equity= 0.07368 + 0.06

Cost of equity= 0.0737 + 0.06

Cost of equity= 0.1337  

Cost of equity= 13.37%

Therefore, correct option is B.

Learn more about Cost of Equity, refer to the link:

https://brainly.com/question/25651634

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