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Vihaan Co
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%
Expert Solution
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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