Question

Instructions to solve the problem:

You are required to use a financial calculator or spreadsheet (Excel) to solve the problem related to the cost of capital.

You are required to show the following 3 steps for the problem.

1. Describe and interpret the assumptions related to the problem.
2. Apply the appropriate mathematical model to solve the problem.
3. Calculate the correct solution to the problem. Submit all answers as percentages and round to two decimal places.

Problem:

YT Inc. will issue new common stock to finance an expansion. The existing common stock just paid a $3.25 dividend. Dividends are expected to grow at a constant rate of 5.5% indefinitely. The stock sells for $38 and flotation expenses of 8% of the selling price will be incurred on new shares. What is the cost of internal equity?

Thank you,

Answer 1

Please refer to below spreadsheet for calculation and answer. Cell reference also provided.

Cell reference -