Oval Inc. just paid a dividend equal to $1.50 per share on its common stock, and it expects this dividend to grow by 4 percent per year indefinitely. The firm plans to issue common stock, which has a $16 per share market price, to raise funds to support operations. Oval's investment bankers estimate that the flotation costs for new issues of common stock will be equal to 8 percent of the issue (market) price. What is Oval's cost of new common equity, re

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andromache andromache · Answer 1 · 2020-05-08T13:41:30+02:00

Answer:

14.6%

Explanation:

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

Dividend (D0) = $1.50

Growth Rate (g) = 4% or 0.04

Dividend (D1)= D0 × (1+g) = $1.50 × (1+0.04) =$1.56

Price Of Stock (P0) = Market Price Per Share × (1- Flotation Cost)

= $16 × (1 - 8 ÷ 100)

= $14.72

Required rate of return(r)=?

(P0) = (D1) ÷ (r-g)

$14.72 = $1.56 ÷ (r-0.04)

r = ($1.56 ÷ $14.72) + 0.04

= 0.106+0.04

= 0.146 or 14.6%