The Yellowknife Craft Corporation has just paid a dividend Do, of $4 per share. Based on the market forecasts, it is expected that the dividend per share will steadily grow at 8% per year for the foreseeable future. The company’s shares are trading at $100 per share.

a) What is Yellowknife’s cost of outstanding common share capital?

b) Yellowknife plans to undertake a new average-risk project. Part of the funds needed to finance the project will be drawn from the corporations’ retained earnings. Since the retained earnings are not sufficient, a new common share issue is planned to fill the financing gap. The after-tax underwriting and issuing costs will amount 3% of market value of the shares to be issued. What is the cost of the common equity capital to be used in financing the project?

c) Is the cost of common equity capital calculated in part b appropriate to evaluate the project?

Answer rating: 100% (QA)

To calculate the cost of outstanding common share capital also known as the cost of equity we can us... View the full answer