Question

Weaver Chocolate Co. expects to earn $3.50 per share during the current year, its expected



dividend payout ratio is 65%, its expected constant dividend growth rate is 6.0%, and its



common stock currently sells for $32.50 per share. New stock can be sold to the public at the



current price, but a flotation cost of 5% would be incurred. What would be the cost of retained



earnings common equity (rs) for Weaver Chocolate Co.? What would be the cost of equity from



new common stock (re)?






Cost of Retained Earnings Common Equity (rs) = ____________________.

Answer 1

Answer:

Cost of Retained Earnings Common Equity (rs) re = D1/(P0 × (1 - F)) + g 13.37%

Explanation:

Consider the following calculations

Expected EPS1 $3.50

Payout ratio 65%

Expected dividend, D1 = EPS × Payout $2.275

Current stock price $32.50

g 6.00%

F 5.00%

re = D1/(P0 × (1 - F)) + g 13.37%