Company’s Cost of external equity
As per Capital Asset Pricing Model [CAPM], the cost of equity is calculated by using the following equation
Cost of equity = Risk-free Rate + [Beta x Market Risk Premium]
= 3.00% + [0.80 x 10.00%]
= 3.00% + 8.00%
= 11.00%
Company’s Cost of external equity
Company’s Cost of external equity = Cost of Equity using CAPM Approach x (1 – Flotation Cost percentage]
= 11.00% x (1 – 0.08)
= 11.00% x 0.92
= 10.12%
“Hence, the Company’s Cost of external equity will be 10.12%”
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