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6 December, 21:25

Jiffy Co. expects to pay a dividend of $3.00 per share in one year. The current price of Jiffy common stock is $60 per share. Flotation costs are $3.00 per share when Jiffy issues new stock. What is the cost of internal common equity (retained earnings) if the longminusterm growth in dividends is projected to be 8 percent indefinitely

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  1. 6 December, 21:50
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    B13%, explained below:

    Explanation:

    Flotaion cost doesn't impact the cost of existing equity and it only impact the cost of new equity. The question asks about cost of existing equity, hence

    Cost of equity = { Expected dividend in one year / Stock price} + growth rate = 3 / 60% + 8%

    Cost of existing equity (Retained earnings) = 13%
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