Jarett & Sons' common stock currently trades at $30.00 a share. It is expected to pay an annual dividend o $2.75 a share at the end of the year (D₁ = $2.75), and the constant growth rate is 3% a year. a. What is the company's cost of common equity if all of its equity comes from retained earnings? Do not round intermediate calculations. Round your answer to two decimal places. % b. If the company issued new stock, it would incur a 12% flotation cost. What would be the cost of equity from new stock? Do not round intermediate calculations. Round your answer to two decimal places. %
Dividend Valuation
Dividend refers to a reward or cash that a company gives to its shareholders out of the profits. Dividends can be issued in various forms such as cash payment, stocks, or in any other form as per the company norms. It is usually a part of the profit that the company shares with its shareholders.
Dividend Discount Model
Dividend payments are generally paid to investors or shareholders of a company when the company earns profit for the year, thus representing growth. The dividend discount model is an important method used to forecast the price of a company’s stock. It is based on the computation methodology that the present value of all its future dividends is equivalent to the value of the company.
Capital Gains Yield
It may be referred to as the earnings generated on an investment over a particular period of time. It is generally expressed as a percentage and includes some dividends or interest earned by holding a particular security. Cases, where it is higher normally, indicate the higher income and lower risk. It is mostly computed on an annual basis and is different from the total return on investment. In case it becomes too high, indicates that either the stock prices are going down or the company is paying higher dividends.
Stock Valuation
In simple words, stock valuation is a tool to calculate the current price, or value, of a company. It is used to not only calculate the value of the company but help an investor decide if they want to buy, sell or hold a company's stocks.
![**Stock Cost Calculation for Jarett & Sons**
**Scenario:**
Jarett & Sons' common stock is currently priced at $30.00 per share. The company anticipates paying an annual dividend of $2.75 at the end of the year. The expected constant growth rate is 3% annually.
**Questions:**
**a. Cost of Common Equity from Retained Earnings**
- **Objective:** Calculate the cost of common equity assuming all equity comes from retained earnings.
- **Instructions:** Avoid rounding intermediate calculations. Round the final answer to two decimal places.
**Answer: [ ] %**
**b. Cost of Equity from New Stock Issue**
- **Objective:** Determine the cost of equity if the company issues new stock, which includes a 12% flotation cost.
- **Instructions:** Avoid rounding intermediate calculations. Round the final answer to two decimal places.
**Answer: [ ] %**
(Note: The percentages can be calculated using models such as the Gordon Growth Model, taking into account specified growth rates and dividend payouts.)](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F9336b0a8-199d-485e-9442-5d0fe1f82213%2Fba49343d-acba-430c-87a1-32fc843ccda4%2Fn5o3hn_processed.jpeg&w=3840&q=75)
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