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  • 2007-12-12 155107 Javits

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    Jaydeep Bairagi
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    Javits & Sons common stock currently trades at $30 per share. It pays an annual dividend of $3 and is expected to grow dividends at a constant rate of 5% per year. Based on this information, the cost of equity for Javits & Sons is 15% if financed only through retained earnings, but would be 16.11% if new stock were issued due to a 10% flotation cost on the new shares.

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    Javits & Sons common stock currently trades at $30 per share. It pays an annual dividend of $3 and is expected to grow dividends at a constant rate of 5% per year. Based on this information, the cost of equity for Javits & Sons is 15% if financed only through retained earnings, but would be 16.11% if new stock were issued due to a 10% flotation cost on the new shares.

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    6 views1 page

    2007-12-12 155107 Javits

    Uploaded by

    Jaydeep Bairagi
    Javits & Sons common stock currently trades at $30 per share. It pays an annual dividend of $3 and is expected to grow dividends at a constant rate of 5% per year. Based on this information, the cost of equity for Javits & Sons is 15% if financed only through retained earnings, but would be 16.11% if new stock were issued due to a 10% flotation cost on the new shares.

    Copyright:

    © All Rights Reserved
    Download as DOC, PDF, TXT or read online from Scribd
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    of 1

    Javits & Sons common stock currently trades at $30 a share.

    It is expected to pay an
    annual dividend of $3.00 a share at the end of the year (D1= $3.00) and the constant
    growth rate is 5% a year.

    A) what is the company's cost of common equity if all of its equity comes from retained
    earnings?

    D1
    Re = +g
    P0
    $3.0
    Re = + 0.05
    $30

    = 0.15

    = 15%

    B) If the company were to issue new stock, it would incur a 10% flotation cost. What
    would the cost of equity from new stock be?

    Floatation Costs = $30 × 10% = $3

    D1
    Re = +g
    P0- Floatation Costs

    $3
    Re = + 0.05
    $30-$3

    = 0.1611

    = 16.11%

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