Weaver Chocolate Co. expects to earn $3.50 per share during the current year, its expected Dividend Payout ratio is 65.0%, its expected constant Dividend growth rate is 6.0%, and its Common Stock currently sells for $32.50 per share. New Stock can be sold to the public at the current Price, but a Flotation cost, F, of 5.0% would be incurred. What would be the cost of Equity for the new Common Stock

Question

Aldo Andersen

Business

24 September, 14:15

Weaver Chocolate Co. expects to earn $3.50 per share during the current year, its expected Dividend Payout ratio is 65.0%, its expected constant Dividend growth rate is 6.0%, and its Common Stock currently sells for $32.50 per share. New Stock can be sold to the public at the current Price, but a Flotation cost, F, of 5.0% would be incurred. What would be the cost of Equity for the new Common Stock

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Patrick Hawkins · Answer 1

13.37%

Explanation:

The computation of the cost of the equity for the new common stock is shown below:

Cost of equity = Dividend : Price * (1 - Flotation cost) + growth rate

where,

Dividend = Earning per share * Dividend Payout ratio

= $3.50 * 65%

= $2.275

And, the other items would remain the same

So, the cost of equity is

= $2.275 : $32.50 * (1 - 5%) + 6%

After solving this, the cost of equity is 13.37%