If the expected dividend growth rate is zero, then the cost of external equity capital raised...
If the expected dividend growth rate is zero, then the cost of external equity capital raised by issuing new common stock (r e) is equal to the cost of equity capital from retaining earnings (r s) divided by one minus the percentage flotation cost required to sell the new stock, (1 − F). If the expected growth rate is not zero, then the cost of external equity must be found using a different formula. True False
Homework Answers
The answer is TRUE
Price of stock (1-Flotation Cost) = Expected Dividend next year/(Cost of Equity - growth rate)
Flotation cost is 0 for internal equity
When growth rate is 0, Cost of external equity = Cost of internal Equity/(1-Flotation cost)
When growth rate is not zero, this formula cannot be used
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