WACC - cost of equity

CFA Level I Corporate Finance
#1

Hi there,

I got a question regarding LOS 30.g “explain and demonstrate the correct treatment of flotation costs.”.
The Kaplan notes include an example on page 58 (book 3 - printed version). It states:

current share price $36
expected dividend next year $2
expected growth rate 5%

calculation of cost of equity:
(2 / 36) + 0.05 = 0.1055

I don’t get th idea behind that calculation.
May someone please help me out and give me a hint which formula is used here.
Well, obviously it’s (div. / price) + growth rate. But in which chapter is this mentioned.

Hopefully, someone can help me out.
Cheers Teemo

#2

That formula doesn’t address flotation costs. It’s simply a formula for the rate of return on an equity investment. It’s a rearrangement of the Gordon Growth formula.