Question

The following financial information is available on Rawls Manufacturing Company: Current per share market price $48.00 Current per share dividend $3.50 Current per share earnings $6.00 Beta 1.1 Expected rate of return on market 12.0% Risk-free rate 6.0% Expected long-term growth rate 5.0% Rawls can issue new common stock to net the company $44 per share. Determine the cost of external equity capital using the dividend capitalization model approach. (Compute answer to the nearest 0.1%.)

Answer 1

Answer:

13.4%

Explanation:

Calculation to determine the cost of external equity capital using the dividend capitalization model approach

Using this formula

Cost of external equity capital = (D1/Pnet) + g

Let plug in the formula

Cost of external equity capital =[$3.50(1.05)/$44] + 0.05

Cost of external equity capital= 0.1335 *100

Cost of external equity capital= 13.4%

Therefore the cost of external equity capital using the dividend capitalization model approach is 13.4%