# Trahan Lumber Company: Cost of Equity Calculation

## What is the cost of equity raised by selling new common stock?

Trahan Lumber Company just paid $1.25 of dividend, which is estimated to grow at 5%. Its common stock is currently traded for $27.50 with a flotation cost of 6.00%. How can we calculate the cost of equity raised by selling new common stock?

## Answer:

The cost of equity raised by selling new common stock can be calculated using the Dividend Growth Model. It is equal to the expected dividend growth rate plus the dividend payout ratio divided by the current market price of the stock minus the flotation costs.

To calculate the cost of equity raised by selling new common stock, we can use the Dividend Growth Model or Gordon Model. The cost of equity is equal to the expected dividend growth rate plus the dividend payout ratio divided by the current market price of the stock minus the flotation costs. In this case, the expected dividend growth rate is 5%, the dividend payout ratio is the dividend divided by the current market price, and the flotation costs are 6%.

Let's perform the calculation:

**Dividend Payout Ratio** = Dividend / Current Market Price

**Dividend Payout Ratio** = $1.25 / $27.50

**Dividend Payout Ratio** = 0.0455 or 4.55%

**Cost of Equity** = Expected Dividend Growth Rate + Dividend Payout Ratio - Flotation Costs

**Cost of Equity** = 5% + 4.55% - 6%

**Cost of Equity** = 3.55%