Byron Corporation's target capital structure consists of 40% debt and 60% common equity. Assume that the firm has no retained earnings. The company's the last dividend (Do) was $2.00, which is expected to grow at a constant rate of 5%, and the current stock price is $21.88. Byron can raise all the debt financing it needs at 14%. If Byron issues new common stock, a 20% flotation cost will be incurred. The firm's tax rate is 40%

10. What is the component cost of the equity raised by selling new common stock ?

15%

16.4

To calculate the component cost of the equity raised by selling new common stock, we need to consider the flotation cost.

Step 1: Calculate the flotation cost
Flotation Cost = 20% of the current stock price
Flotation Cost = 20% × $21.88 = $4.38

Step 2: Calculate the net proceeds from selling the stock
Net Proceeds = Current Stock Price - Flotation Cost
Net Proceeds = $21.88 - $4.38 = $17.50

Step 3: Determine the cost of issuing new common stock
Cost of Issuing New Common Stock = Net Proceeds / (1 - Flotation Cost)
Cost of Issuing New Common Stock = $17.50 / (1 - 0.20) = $17.50 / 0.80 = $21.88

Therefore, the component cost of the equity raised by selling new common stock is $21.88.

To calculate the component cost of equity raised by selling new common stock, we need to consider the cost of issuing new common stock (including flotation cost) and the growth rate of the dividends.

1. First, let's calculate the flotation cost:
Flotation cost is the cost incurred by a company when issuing new securities. In this case, the flotation cost associated with issuing new common stock is 20% of the stock price. Therefore, the flotation cost is:
Flotation Cost = 20% * $21.88 = $4.376

2. Next, we calculate the dividend yield (Div/Yield):
The dividend yield is the ratio of the annual dividend per share (DPS) to the current stock price. In this case, the annual dividend per share is expected to grow at a constant rate of 5% and the last dividend (Do) is $2.00. Therefore, the dividend yield is calculated as follows:
Dividend Yield = Expected Dividend (Do * (1 + growth rate)) / Current Stock Price
Dividend Yield = ($2.00 * 1.05) / $21.88

3. Finally, we can calculate the component cost of the equity raised by selling new common stock using the Dividend Growth Model. The Dividend Growth Model calculates the required return on equity.

Component Cost of Equity = (Dividend per Share / Current Stock Price) + Growth Rate

Component Cost of Equity = (Dividend Yield) + Growth Rate

Substituting the values we calculated from step 2:

Component Cost of Equity = ((2.00 * 1.05) / 21.88) + 0.05

Simplify to find the component cost of equity raised by selling new common stock.