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Costly Corporation is considering using equity financing. Currently, the firm's stock is selling for $60.00 per...

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?

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Answer #1
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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