The question says "Newmass, Inc. paid a cash dividend to its common shareholders over the past 12 months of $2.20 per share." That means $2.20 is a past dividend. The Dividend Growth Model requires the use of the next dividend ? a future dividend ? so $2.20 must be increased by the dividend's expected growth rate of 6% before using it in the formula. $2.20 × 1.06 = $2.332 and we will use that as d1 in the formula. Here is the Dividend Growth Model formula. The cost of funds from the sale of new shares of stock can be calculated with the following formula: d1 Cns = ---------------+ g P n Where: Cns = Cost of the new issuance of common stock d1 = The next dividend to be paid Pn = Net proceeds of the issue (selling price minus issuance costs) g = Annual expected % growth in dividends Inputting the information into this equation we get: 2.332 Cns = ------------------------+.06 = .1214, or 12.14% 40 ? (.05 × 40)
This answer uses the current dividend instead of the next dividend and does not take into account the flotation costs. The question says "Newmass, Inc. paid a cash dividend to its common shareholders over the past 12 months of $2.20 per share." That means $2.20 is a past dividend. The Dividend Growth Model requires the use of the next dividend ? a future dividend ? so $2.20 must be increased by the dividend's expected growth rate of 6% before using it in the formula. Also, the denominator needs to be net of flotation costs. See the correct answer for a complete explanation.
This answer uses the current dividend instead of the next dividend. The question says "Newmass, Inc. paid a cash dividend to its common shareholders over the past 12 months of $2.20 per share." That means $2.20 is a past dividend. The Dividend Growth Model requires the use of the next dividend ? a future dividend ? so $2.20 must be increased by the dividend's expected growth rate of 6% before using it in the formula. See the correct answer for a complete explanation.
This answer does not take into account the flotation costs. The denominator of the formula needs to be net of flotation costs. See the correct answer for a complete explanation.
|
