7. Problem 10.04 (Cost of Equity with and without Flotation)

Jarett & Sons' common stock currently trades at $40.00 a share. It is expected to pay an annual dividend of $3.00 a share at the end of the year (D₁ = $3.00), and the constant growth rate is 7% a year.

1. What is the company's cost of common equity if all of its equity comes from retained earnings? Do not round intermediate calculations. Round your answer to two decimal places.

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2. If the company issued new stock, it would incur an 11% flotation cost. What would be the cost of equity from new stock? Do not round intermediate calculations. Round your answer to two decimal places.

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