Calculate the cost of new common equity financing of stock R using Gordon Model Round the answers to two decimal places in percentage form

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%.