# Messman Manufacturing will issue common stock to the public for $30. The expected dividend and... ## Question: Messman Manufacturing will issue common stock to the public for$30. The expected dividend and the growth in dividends are \$3.00 per share and 5%, respectively.

If the floating cost is 2% of the issue proceeds, then what is the after-tax cost of debt? Disregard the tax shield from the amortization of flotation costs.

## Flotation Cost of Stock Issues:

When firm issue stocks, the flotation costs are the expenses associated with the issuance. A major component of flotation costs is the underwriting fees, which are charged by the investment banks for selling the stocks to the public.

We can use the dividend growth model to compute the cost of equity, as follows:

• cost of equity = expected dividend / (price per share - flotation cost) + dividend growth rate
• cost of equity = 3 / (30 - 30 * 2%) + 5%
• cost of equity = 15.20%

That is, the cost of equity for the firm is 15.20%. 