Analysts of the ICM Corporation have indicated that the company is expected to grow at a 5...
Question:
Analysts of the ICM Corporation have indicated that the company is expected to grow at a 5 percent rate for as long as it is in business. Currently, ICM's stock is selling for $100 per share. The most recent dividend paid by the company was $5 per share (i.e., D0 = $5). If ICM issues new common stock, it will incur flotation costs equal to 7 percent. ICM's marginal tax rate is 40 percent. What is its cost of new equity?
Dividend Growth Model:
The dividend growth model assumes that dividend grows at a constant rate g indefinitely. If the most recent dividend payment from the firm is D, and the required rate of return on the firm's stock is r, then the price of the stock according to the dividend growth model is D(1 + g)/(r - g).
Answer and Explanation: 1
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View this answerMost recent dividend payment = $5, growth rate of dividend = 5%, and the price of the stock = 100. Applying the dividend growth model, 5*(1 + 5%) /...
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