Trahan Lumber Company hired you to help estimate its cost of capital. You obtained the following data: D1 = $1.25; P0 = $27.50; g = 5.00% (constant); and F = 6.00%. What is the cost of equity raised by selling new common stock? a. 9.44% b. 9.84% c. 10.23% d. 9.06% e. 10.64%

Cost of equity raised by selling new common stock is 9.84%

Explanation:

GIVEN the following ;

Dividend (D1) = $1.25

Price (P0) = $27.50

F = 6.00% = 0.06

g = 5.00% = 0.05

To find the cost of equity raised by selling new common stock, The relation below can be applied:

Cost of equity = [D1 / P0 × ( 1 - F)] +g

Cost of equity :

[$1.25 / ($27.50 × 0.94)] + 0.05

[$1.25 / $25.85] + 0.05

0.048355 + 0.05 = 0.098355

0.0984 × 100 = 9.84%

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