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Glaham Restaurants expects to pay a common stock dividend of $1
Glaham Restaurants expects to pay a common stock dividend of $1.50 per share next year (d1). Dividends are expected to grow at a 4% rate for the foreseeable future. Glaham's common stock is selling for $18.50 per share and issuance costs are $3.50 per share. What is Glaham's cost of external equity? 20.59% O 12.11% 14.00% 10.00%
Expert Solution
Stock Price : Price of any security is present value of future cash flows it, that are discounted at specified discount rate.
Stock Price = D1 / [ Ke - g ]
D1 = D0 ( 1 +g )
D1 - Div after 1 Year
P0 = Price Today
Ke - required Ret
g - Growth Rate.
Cost of Equity = [ Expected Div / [ Price - Issue cost ] ] + Growth rate
= [ 1.50 / [ 18.5 - 3.5 ] ] + 0.04
= [ 1.5 / 15 ] + 0.04
= 0.10 + 0.04
= 0.14 I.e 14.00%
Option C is correct.
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