Problem:
Myers Corporation's stock currently trades at $40 a share. Investors estimate that the year-end dividend will be $2.00 a share and that its dividend will grow at 5% a year (i.e., D 1 = $2.00 and g = 5%). The company needs to issue new stock in order to fund its upcoming projects, and investment bankers estimate that the flotation cost will be 4%.
Required:
Question: What is Myers' cost of new external equity?
- 9.6%
- 11.3%
- 8.5%
- 10.2%
- 12.0%
Note: Provide support for your rationale.