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Javits & Sons’ common stock is currently trading at $30 a share. The stock is expected to pay a dividend of $3

Javits & Sons’ common stock is currently trading at $30 a share. The stock is expected to pay a dividend of $3.00 a share at the end of the year (D1 _ $3.00), and the dividend is expected to grow at a constant rate of 5 percent a year. If the company were to issue external equity, it would incur a 10 percent flotation cost. What are the costs of internal and external equity?

Public Comments

1. In this case, the cost of internal equity (or retained earnings) will be equal to the required rate of return on the stock (Rs) Here Rs = D1/P +g so, (3/30) + .05 = .10 + .05 = .15 (or 15%) Now, you have to factor in flotation costs to find the cost of external equity... Re (for external) =[ D1/(P*(1-F))] + g Here Re = [3/(30*(1-.10) ]+ .05 Re = 3/(30*.90) + .05 = 3/27 + .05 = .1111 + .05 so, Re = .1611