Trahan Lumber Company hired you to help estimate its cost of common equity. You obtained the following data: D1 = $1.25; P0 = $27.50; g = 5.

Trahan Lumber Company hired you to help estimate its cost of common equity. You obtained the following data: D1 = $1.25; P0 = $27.50; g = 5.00% (constant); and F = 6.00%. What is the cost of equity raised by selling new common stock? Select one: a. 9.06% b. 9.44% c. 9.84% d. 10.23% e. 10.64%

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  1. Answer:

    cost of equity raised by selling new common stock = 9.84%

    so correct option is c. 9.84%

    Explanation:

    given data

    D1 = $1.25

    Po = $27.50

    g = 5.00%

    F = 6.00%

    to find out

    cost of equity raised by selling new common stock

    solution

    we will apply here cost of equity raised by selling new common stock formula that is express as

    cost of equity raised  = [tex]\frac{D1}{Po-F*Po}[/tex]  + g   ………………1

    put here value we get

    cost of equity raised  = [tex]\frac{D1}{Po-F*Po}[/tex]  +g

    cost of equity raised  = [tex]\frac{1.25}{27.50-0.06*27.50}[/tex]  + 5%

    solve we get

    cost of equity raised by selling new common stock = 9.84%

    so correct option is c. 9.84%

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