What is the estimated cost of newly issued common stock

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Reference no: EM131958315

Jana estimates that if it issues new common stock, the flotation cost will be 15%. Jana incorporates the flotation costs into the dividend growth approach. What is the estimated cost of newly issued common stock, taking into account the flotation costs.

Pertinent information:

firms tax rate=40%

Jana's coupon=12%, semiannual, noncallable bond with 15 years remaining to maturity is $1,153.72. no short term interest bearing debt.

current price of the firms 10%, $100 par value, quarterly dividend, perpetual preferred stock is $116.95. Jana would incur flotation costs equal to 5% of the proceeds on a new issue.

Jana's common stock selling at $50/share. Last dividend was $3.12 and dividends are expected to grow at a constant rate of 5.8%. Jana's beta=1.2, yield on t-bonds=5.6%, market risk premium is estimated to be 6%. The firm uses a 3.2% risk premium.

Reference no: EM131958315

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