Seasons, Inc. has just decided to issue 1 million shares of new equity. The firm has had a steady dividend growth of 3% and is expected to continue along this path, having just paid a $3.23 per share dividend. The flotation costs for the new equity amount to 2.2% of the total capital raised and the firm receives $31.4 million before flotation costs, calculate the cost of external equity.
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A. B. C. D.D
IF F is the percentage flotation cost and P is the amount of new equity raised per new share, then Ke = D1/[P(1-F)] + g, where Ke is the cost of external equity.
Here, g = 3%, D1 = 3.23*(1+3%) = $3.32, P = $31.4 and F = 2.2%. Therefore, Ke = 3.32/(31.4*(1-0.022)) + 3% = 13.83%.