Messman manufacturing will issue common stock to public for $30. The expected dividend and the...

Question:

Messman manufacturing will issue common stock to public for $30. The expected dividend and the growth in dividends are $3.00 per share and 5%, respectively. If the flotation cost is 10% of issue's gross proceeds, what is the cost of external equity?

Dividend Growth Model:

Dividend Growth model states that the cost of equity of the company with constant dividends and perpetual growth is the expected dividend divided by the current share price plus the growth rate of the dividend

Answer and Explanation:

As per Dividend Growth Model,

Cost of Equity = (Expected Dividend / Current Price net of flotation costs) + Growth Rate

= 3 / (30 x 90%) + 0.05

= 16.11%


Learn more about this topic:

The Dividend Growth Model

from Finance 101: Principles of Finance

Chapter 14 / Lesson 3
6.5K

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