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Cost of common stock: Whitewall Tire Co
Cost of common stock: Whitewall Tire Co. just paid a $2.00 dividend on its common shares. Whitewall is expected to increase its annual dividend by 5 percent per year into the foreseeable future. The current price of Whitewall's common shares is $15. If the floatation cost for issuing new equities is 6% of the equity price, what will be the cost of new common equity for Whitewall? Round your intermediate calculation to five decimal places and final percentage answer to two decimal places.
Expert Solution
Computation of the cost of new common equity:-
Cost of equity = (D1 / (Current price * (1 - Flotation cost))) + Growth rate
= ($2 * (1 + 5%) / ($15 * (1 - 6%))) + 5%
= ($2.10000 / $14.10000) + 5%
= 14.89362% + 5%
= 19.89%
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