Costly Corporation is considering using equity financing. Currently, the firm's stock is selling for $38.00 per share. The firm's dividend for next year is expected to be $5.80 with an annual growth rate of 7.0% thereafter indefinitely. If the firm issues new stock, the flotation costs would equal 12.0% of the stock's market value. The firm's marginal tax rate is 40%. What is the firm's cost of internal equity?
| 24.34% |
| 22.26% |
| 23.33% |
| 25.56% |
| 20.99% |
Expected Dividend = $5.80
Current Price = $38.00
Growth Rate = 7.00%
Cost of Internal Equity = Expected Dividend / Current Price +
Growth Rate
Cost of Internal Equity = $5.80 / $38.00 + 0.07
Cost of Internal Equity = 0.2226 or 22.26%
Costly Corporation is considering using equity financing. Currently, the firm's stock is selling for $38.00 per...