Costly Corporation is considering using equity financing. Currently, the firm's stock is selling for $60.00 per share. The firm's dividend for next year is expected to be $5.30 with an annual growth rate of 6.0% thereafter indefinitely. If the firm issues new stock, the flotation costs would equal 15.0% of the stock's market value. The firm's marginal tax rate is 40%. What is the firm's cost of external equity?
Cost of external equity ( r) | D1÷[P0×(1-F)]+g |
Here, | |
Stock price (P0) | $ 60.00 |
Expected dividend (D1) | $ 5.30 |
Flotation cost (F) | 15.00% |
Growth rate (g) | 6.00% |
Cost of external equity ( r) | 16.39% |
5.3/(60×(1-15%))+6% |
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