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Sagot :
Answer:
(2.25 * 1.06) / [26.5 * (1 - 8%)] + 6% = .15782608 now multiply by 100 to get %
15.78%
Explanation:
The following formula is used to calculate cost of new equity:
Cost of New Equity = D1 / [ Po * (1 - F)] + g
Where,
D1 is dividend in next period...current dividend * (1 + dividend growth rate)
Po is the issue price of a share of stock
F is the ratio of flotation cost to the issue price
g is the dividend growth rate.
The growth rate referred above is the sustainable growth rate which equals the product of retention ratio and return on equity (ROE).
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