Answer:
cost of equity = 13.2%
Explanation:
According to the dividend valuation, the value of a stock is the present value of expected future dividends discounted at the required rate of return.
The model can me modified to determined the cost of equity having flotation cost as follows:
Cost of equity = D(1+r )/P(1-f) + g
d- dividend, p- price of stock , f - flotation cost , - g- growth rate
D- 3.50 , p - 3.50, f- 10% g- 5%
Applying this to the question;
cost of equity - 3.50× (1.05)/3.50×(1-0.1) + 0.05
= 0.1316 × 100
cost of equity = 13.2%
