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Homework answers / question archive / Vihaan Co

Vihaan Co

Finance

Vihaan Co. has 5,000,000 common shares outstanding, which are currently trading at $55.00 per share. The shares recently paid a dividend of $4.00 per share and analysts expect the dividend to grow at 3.5% per year into the foreseeable future. Flotation costs are expected to be 6% before tax on the issue of common shares. Vihaan has an income tax rate of 28%. What is the cost of the common shares for Vihaan?

 

a) 7.87%

b) 11.24%

c) 11.37%

d) 11.85%

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Computation of Cost of Common Shares for Vihaan:

Cost of Common Shares = Next Year Dividend/(Current Stock Price*(1-After Tax Flotation Cost)) + Growth Rate

= $4*(1+3.5%)/($55*(1-(6%*(1-28%))) + 3.5%

= $4.14 / ($55*4.32%) + 3.5%

= $4.14/$52.624 + 3.5%

= 7.87% + 3.5%

Cost of Common Shares = 11.37%

So, the correct option is C "11.37%".

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