Suppose that Wave Runners' common shares sell for $35 per share, are expected to set their next annual dividend at $2.00 per share, and that all future dividends are expected to grow by 10 percent per year, indefinitely. If Wave faces a flotation cost of 15% on new equity issues, what will be the flotation-adjusted cost of equity?
A) 6.73%
B) 10.07%
C) 15.71%
D) 16.72%

Question

Quizplus · Accepted Answer

The flotation-adjusted cost of equity can be calculated using the formula: Cost of Equity = (D1 / (P0 * (1 - F))) + g, where D1 is the expected dividend, P0 is the current stock price, F is the flotation cost, and g is the growth rate. Substituting the given values: Cost of Equity = ($2.00 / ($35 * (1 - 0.15))) + 0.10 = 16.72%.

Suppose That Wave Runners' Common Shares Sell for $35 Per