cost of external equity capital raised by issuing new common stock (re) is defined as follows, in words: "The cost of external equity equals the cost of equity capital from retaining earnings (rs), divided by one minus the percentage flotation cost required to sell the new stock, (1 - F)."

Question

Quizplus · Accepted Answer

The correct formula for the cost of external equity raised by issuing new common stock is:

re = (D1 / P0) + g + [(P0 - net proceeds from issuing new stock) / (P0 - net proceeds from issuing new stock + Flotation costs)]

This formula takes into account the dividend, expected growth rate, net proceeds from issuing new stock, and flotation costs. The formula given in the statement is not complete and does not include all the necessary variables.

Cost of External Equity Capital Raised by Issuing New Common