What would be the cost of new common stock equity for Tangshan Mining if the firm just paid a dividend of $4.25, the stock price is $55.00, dividends are expected to grow at 8.5 percent indefinitely and flotation cost are $6.25 per share?
Calculate the present value, at an interest rate of 6% per annum, of a cash flow of $20,000 due in 25 years (to 2 decimal places).
To calculate the cost of new common stock equity, we need to use the Gordon Growth Model. The formula for the Gordon Growth Model is as follows:
Cost of Equity = (Dividends per Share / Current Stock Price) + Growth Rate
Let's break down the given information step by step:
1. Dividends per share (DPS) = $4.25
2. Current stock price = $55.00
3. Growth rate (g) = 8.5%
4. Flotation cost per share = $6.25
Before we can calculate the cost of equity, we need to adjust the dividend per share for the flotation costs. The net dividend will be calculated as follows:
Net Dividends per Share = Dividends per Share - Flotation Cost per Share
Net Dividends per Share = $4.25 - $6.25 = -$2.00
Now we can calculate the cost of new common stock equity using the Gordon Growth Model:
Cost of Equity = (Net Dividends per Share / Current Stock Price) + Growth Rate
Cost of Equity = (-$2.00 / $55.00) + 0.085
Cost of Equity = -0.03636 + 0.085
Cost of Equity = 0.0486 or 4.86%
Therefore, the cost of new common stock equity for Tangshan Mining is 4.86%.