Answer:
cost of new common stock= 16.3%
Explanation:
The value of a stock is the present value of its expected future dividend discounted at the cost of equity.
Cost of equity can be determined, using the capital pricing model (CAPM).
Cost of equity using CAPM:
Ke = Rf + β(Rm-Rf)
Rf= 6%, Rm-Rf = 5%, β= 2.00
E(r) = 6% + 2.00× (5%) = 16%
Current market price:
Market price = 3.00 × (1.1)/(0.16-0.1)
= $55
In incorporating the flotation cost and using the dividend valuation model,
the cost new common stock will be:
Cost of new common stock:
= D0× (1+g)/Po × (1-F) + g
Po- 55, g- 10%, F- 5%, Do- 3
= 3 × (1.1)/55× (1-0.05) + 0.1
= 16.3%
