Cost of Equity Calculation for Trahan Lumber Company
What is the formula to calculate the cost of equity raised by selling new common stock for Trahan Lumber Company?
The cost of equity raised by selling new common stocks for Trahan Lumber Company can be calculated by the formula Re = D1/(P0(1-F)) + g.
Cost of Equity Calculation:
To calculate the cost of equity raised by selling new common stock for Trahan Lumber Company, we need to use the formula for calculating the cost of new equity, which is given as: Re = D1/(P0(1-F)) + g where,
D1 is the expected annual dividend per share,
P0 is the current market price per share,
F is the flotation cost expressed as a decimal,
g is the rate of growth in dividends.
Substituting the given values into the equation, we get: Re = 1.25/(30*(1-0.06)) + 0.05 = 0.048 + 0.05 = 0.098 (or) 9.8%
Therefore, the cost of equity raised by selling new common stocks is 9.8%.