The Cost of Equity and Flotation Costs Messman Manufacturing

The Cost of Equity and Flotation Costs

Messman Manufacturing will issue common stock to the public for $30. The expected dividend and growth in dividends are $3.50 per share and 6%, respectively. If the flotation cost is 9% of the issue\'s gross proceeds, what is the cost of external equity, re? Round your answer to two decimal places.

Solution

cost of external equity=(D1/Current price(1-Floatation costs)+Growth rate

=3.5/(30(1-0.09))+0.06

=(3.5/27.3)+0.06

which is equal to

=18.82%(Approx).