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Author Question: Dickerson Corporation's common stock is currently selling for 38. Last year's dividend was 4.00 per ... (Read 48 times)

abc

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on: Jul 10, 2018
Dickerson Corporation's common stock is currently selling for 38. Last year's dividend was 4.00 per share.
  Investors expect dividends to grow at an annual rate of 7 percent indefinitely.
 
  Flotation costs of 4 will be
  incurred when new stock is sold.
  a. What is the cost of internal common equity?
  b. What is the cost of new common equity?

Question 2

Kinard's Kennels Inc ROE is 20. Their dividend payout ratio is 70. The last dividend, just paid,
  was 2.00.
 
  If dividends are expected to grow by the company's internal growth rate indefinitely,
  what is the current value of Kinard's common stock if its required return is 18?
  A) 14.92 B) 17.67 C) 16.89 D) 11.52
Foundations of Finance ¦ Keown, Petty, Martin ¦ 9th Edition
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Li Jun

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Reply #1 on: Jul 10, 2018
Answer to Question 1

a. D1 = 4.00  1.07 = 4.28
Cost of internal common equity = 4.28/38 + .07 = 18.26
b. Cost of new common equity = 4.28/(38  .

Answer to Question 2

B


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