Question
During the last few years, a corporation has been too constrained by the high cost of capital to make many capital investments. Recently, though, capital
During the last few years, a corporation has been too constrained by the high cost of capital to make many capital investments. Recently, though, capital costs have been declining, and the company has decided to look seriously at a major expansion program that had been proposed by the marketing department. The company has historically earned a 15.0% return on equity and has retained 35% of earnings; investors expect this situation to continue in the future. They have also used the growth rate retention model to estimate the future dividend growth rate. The corporation estimates that if it issues new common stock, the flotation cost will be 15.0%. The company incorporates the flotation costs into their DCF approach. The most recent/last annual dividend was $4.19. The stock is currently selling for $50.0 per share.
What is the estimated cost of newly issued common stock, taking into account the flotation cost?
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