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Sunny Day Manufacturing Company has a current stock price of $33.35 per share, and is expected to pay a per-share dividend of $2.03 at the end of the year. The company's earnings' and dividends' growth rate are expected to grow at the constant rate of 8.70% into the foreseeable future. If Sunny Day expects to incur flotation costs of 6.50% of the value of its newly-raised equity funds, then the flotation-adjusted (net) cost of its new common stock (rounded to two decimal places) should be.

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  1. Today, 02:59
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    Flotation adjusted cost of equity is 15.21%.

    Explanation:

    Current Stock price, P = $33.35 per share

    Flotation cost, F = 6.50%

    Net proceed from sale of stock = P * (1 - F)

    = $33.35 * (1 - 6.50%)

    = $31.18225

    Net proceed from sale of stock is $31.18225.

    Flotation adjusted cost of equity:

    = (Expected dividend : Net Proceed from sale of equity) + Growth rate

    = ($2.03 : $31.18225) + 8.70%

    = 6.51% + 8.70%

    = 15.21%

    Flotation adjusted cost of equity is 15.21%.
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