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Cost of New Equity Calculator

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The Cost of New Equity Calculator helps businesses determine the cost associated with raising capital through the issuance of new equity. This calculation includes factors such as dividends, growth expectations, and flotation costs. By understanding the cost of new equity, businesses can evaluate whether issuing new shares is a financially viable strategy compared to other financing options.

This tool is crucial for corporate finance decisions, enabling companies to optimize their capital structure and assess shareholder value impact.

Formula of Cost of New Equity Calculator

The formula for calculating the cost of new equity is:

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Cost of New Equity = (Dividend per Share ÷ Current Market Price per Share) + Growth Rate + (Flotation Costs per Share ÷ Current Market Price per Share)

Breakdown of Variables

  1. Dividend per Share
    The expected dividend payment for each share. This represents the return provided to shareholders.
  2. Current Market Price per Share
    The current trading price of one share in the stock market.
  3. Growth Rate
    The expected annual growth rate of dividends, reflecting the company’s projected financial performance.
  4. Flotation Costs per Share
    Costs incurred for issuing new shares, such as underwriting fees, legal expenses, and marketing costs, expressed on a per-share basis.

General Terms and Pre-Calculated Values Table

TermPre-Calculated Value
Average Dividend Yield2%–5%
Typical Growth Rate of Dividends3%–6% annually
Flotation Costs$1–$5 per share

This table provides commonly referenced values for estimating the cost of new equity in various scenarios.

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Example of Cost of New Equity Calculator

Scenario: A company plans to issue new equity. The current market price per share is $50, the dividend per share is $2, and the expected growth rate is 4%. Flotation costs are $2 per share.

Step 1: Calculate the Dividend Yield
Dividend per Share ÷ Current Market Price per Share
$2 ÷ $50 = 0.04 or 4%

Step 2: Account for Growth Rate
Add the expected growth rate to the dividend yield:
4% + 4% = 8%

Step 3: Include Flotation Costs
Flotation Costs per Share ÷ Current Market Price per Share
$2 ÷ $50 = 0.04 or 4%

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Step 4: Combine All Components
Cost of New Equity = 4% + 4% + 4% = 12%

Thus, the cost of new equity is 12%.

Most Common FAQs

1. Why is it important to calculate the cost of new equity?

Calculating the cost of new equity helps businesses understand the financial implications of raising capital through stock issuance. It aids in comparing equity financing with other options like debt.

2. How do flotation costs impact the cost of new equity?

Flotation costs increase the overall cost of raising equity by accounting for the expenses incurred during the issuance process. Higher flotation costs result in a higher cost of equity.

3. Can the growth rate of dividends change over time?

Yes, the growth rate may vary depending on the company’s financial performance, market conditions, and strategic decisions.

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