The cost of equity capital for a new common stock issuance can best be described as: A) k_n= [D₁/(P_o-F) ] + g B) k_n= [D₁/(P_o+F) ] + g C) k_n= [D₁/(P_o+F) ] - g D) k_n= (D₁+g)/(P_o+F)

Question

Quizplus · Accepted Answer

The correct formula for the cost of equity capital for a new common stock issuance is: $k_{e} = \frac{D_1}{P_0 - F} + g$, where $D_1$ is the expected dividend per share one year from now, $P_0$ is the current price of the stock, $F$ is the flotation cost per share, and $g$ is the growth rate of dividends. Choice A correctly represents this formula, albeit with placeholder symbols for clarity.

The Cost of Equity Capital for a New Common Stock