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Homework answers / question archive / Calculate the cost of new common equity financing of stock R using Gordon Model Round the answers to two decimal places in percentage form
Calculate the cost of new common equity financing of stock R using Gordon Model Round the answers to two decimal places in percentage form. (Write the percentage sign in the "units" box) Last Year Dividend Growth Rate of Dividends Selling Price of Floatation Cost of Common Stock Costs Equity Stock R $4.81 5.1% $48.01 $3.88 ? Your Answer: Answer units
Given that :
Last year dividend =$4.81
Growth rate of dividend= 5.1%
Selling price of stock =$48.01
Floatation cost =$3.88
D1 i.e. dividend at year 1 = dividend(1+g)
Here g = growth rate of dividend
Hence D1 = 4.81 x ( 1+0.051)
D1= $ 5.06
As per Gordon model:
P0 = D1/(Re-g)
Here P0 = current price
D1 = Dividend at year 1
G = growth rate
Re= cost of equity
Cost of equity after adjust floatation cost(f) =
Re={ D1/(P0-f) } +g
Re = {5.06/(48.01-3.88)}+ 0.051
Re = 0.1657 i.e. 16.57% ( approx)
Hence the cost of new common equity is 16.57%.
