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Keystone Corporation will issue new common stock to finance an expansion. The existing common stock just paid a $1.50 dividend, and dividends are expected to grow at a constant rate 8% indefinitely. The stock sells for $45, and flotation expenses of 5% of the selling price will be incurred on new shares. What is the cost of new common stock be for Keystone Corp.?A) 11.33%B) 11.51%C) 11.60%D) 11.79%E) 12.53%

Respuesta :

TomShelby

Answer:

D) Ke = 11.79%

Explanation:

We will use the gordon dividen grow model to sovle for  the cost of new equity

[tex]\frac{divends}{return-growth} = Intrinsic \: Value[/tex]

we clear for return

[tex]return = \frac{divends}{Stock} + grow[/tex]

in this case we call the retun cost of equity

and we consider the impact of flotation ost, because this is new equity, which reduce the proceeds from the stock

[tex]cost \:of \:new \:equity= \frac{divends}{Stock (1-F)} + grow[/tex]

next year dividend 1.50 x 1.08 = 1.62

flotation cost 5% = 0.05

Stock 45

grow 0.08

[tex]Ke= \frac{1.62}{45(1-0.05} + 0.08[/tex]

Ke = 0.117894737  = 11.79%

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