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.