Suppose that Tan Lines’ common shares sell for $20 per share, are expected to set their next annual dividend at $1.00 per share, and that all future dividends are expected to grow by 5 percent per year, indefinitely. If Tan Lines faces a flotation cost of 10 percent on new equity issues, what will be the flotation-adjusted cost of equity?
$1/[$20 − (0.10 × $20)] + 0.05 = ($1/$18) + 0.05 = 0.1055556 = 10.56%.
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