The jackson company has just paid a dividend of $3.00 per share on its common stock, and it expects this dividend to grow by 10%

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The jackson company has just paid a dividend of $3.00 per share on its common stock, and it expects this dividend to grow by 10%

per year, indefinitely. the firm has a beta of 2.00; the risk-free rate is 6%; and the market risk premium is 5%. the firm's investment bankers believe that new issues of common stock would have a flotation cost equal to 5% of the current market price. what will be jackson's cost of new common stock if it issues new stock in the marketplace today

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Katen [3.5K] · Answer 1 · 2026-04-02T19:49:36+03:00

The new common stock cost is 16.3%. The price of a stock is determined as the present value of its anticipated future dividends discounted at the cost of equity. The cost of equity can be established through the capital asset pricing model (CAPM). According to CAPM, the cost of equity is defined as Ke = Rf + β(Rm-Rf), where Rf is 6%, Rm-Rf equals 5%, and β equals 2.00. This leads us to: E(r) = 6% + 2.00 × (5%) = 16%. The current market price is calculated as: Market price = 3.00 × (1.1)/(0.16-0.1) = $55. By factoring in the flotation costs while applying the dividend valuation model, the cost of the new common stock is given by: Cost of new common stock = D0 × (1 + g)/Po × (1-F) + g, where Po is 55, g is 10%, F is 5%, and D0 is 3. The calculation yields: 3 × (1.1)/55 × (1-0.05) + 0.1 = 16.3%.