Cost of common stock: Two-Stage Rockets common stock is expected to pay an annual

dividend equal of $1.25, and it is commonly known that the firm expects dividends paid to increase by 8 percent for the next two years and by 2 percent thereafter. If the current price of Two-Stages common shares is $17.80, what is the cost of common equity capital for the firm? Please use appropriate formulas in the attached spreadsheet. Show all work.

13.9 Cost of common stock: Two-Stage Rocket's common stock is expected to pay an annual dividend equal of $1.25, and it is commonly known that the firm expects dividends paid to increase by 8 percent for the next two years and by 2 percent thereafter. If the current price of Two-Stage's common shares is $17.80, what is the cost of common equity capital for the firm? Expected dividend (D1) $1.25 8% 2 Growth rate (first phase) Number of years in first ph Growth rate (2ndphase) Current stock price 2% $17.80 Cost of common equity capital Po = [D1/(1+k)] +[D1(1+g1)/(1+k)2]+ [D1(1+g1)2/(1+k)3]+[(D1(1+g1)2(1+g2)/k-g2)*(1/(1+k)3] ==> 17.8 = 1.25/(1+k) + (1.25(1.08))/(1+k)2+(1.25(1.08)(1.08))/(1+k)3 + (1.25(1.08)(1.08)(1.02)/(k-.0 ==> 17.8 = 1.25/(1+k) + 1.35/(1+k)2+1.458/(1+k)3+1.487/(k-.02)*(1/(1+k)3 Comment kcs = g2= g1= P0 = Change this number until the calculated price equals $17.8 2% 8% Growth rate for perpetuity Growth rate during the first phase of 2 years Formula: =NPV(d22,d29:d32) - This formula calculates the present value of the future dividends in cells d29 to d31 with the discount rate in d22. Year 1 = D1 2 = D2 =d29 (1 + g1) 3 = Formula: = [d30 * (1 + g1)] + ([d30* (1 + g1)* (1 + g2)]/(d22-d23)) This formula calculates the value of D3 and the present value of all cash flows after Year 2 in Year 3 dollars. d to pay an annual dividends paid er. If the current mon equity capital g2)*(1/(1+k)3] 1.08)(1.08)(1.02)/(k-.02))/(1+k)3 e equals $17.8 calculates ells d29 to d31 1 + g2)]/(d22-d23)) he present value