Question

Costly Corporation is considering using equity financing. Currently, the firm's stock is selling for $26.00 per share. The firm's dividend for next year is expected to be $4.90 with an annual growth rate of 8.0% thereafter indefinitely. If the firm issues new stock, the flotation costs would equal 11.0% of the stock's market value. The firm's marginal tax rate is 40%. What is the firm's cost of internal equity

Answer 1

Answer: 26.85%

Explanation:

Based on the information given in the question, the firm's cost of internal equity will be calculated as:

Cost of equity = (D1/Current price) + Growth rate

= (4.90 / 26.00) + 8.0%

=(4.9/26) + 0.08

=26.85%

Therefore, the firm's cost of internal equity is 26.85%.