BBK Industries plans to sell 2 million shares of its common stock for $80 per share, with an annual dividend of $1.90 per share. Determine the lower cost of equity capital under the following conditions: (a) The company expects a dividend growth rate of 3% per year, and (b) a 5% discount is offered to attract stock purchases and a much lower dividend growth rate of 1% per year is anticipated.
What will be an ideal response?
(a) Re = 1.90/80 + 0.03
= 0.05375 (5.38%)
(b) Re = 1.90/80*0.95 + 0.01
= 0.035 (3.5%)
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