Javits & Sons common stock currently trades at $30 a share. It is expected to pay an
annual dividend of $3.00 a share at the end of the year (D1= $3.00) and the constant
growth rate is 5% a year.
A) what is the company's cost of common equity if all of its equity comes from retained
earnings?
D1
Re g
P0
$3.0
Re 0.05
$30
= 0.15
= 15%
B) If the company were to issue new stock, it would incur a 10% flotation cost. What
would the cost of equity from new stock be?
Floatation Costs = $30 × 10% = $3
D1
Re g
P0 Floatation Costs
$3
Re 0.05
$30-$3
= 0.1611
= 16.11%