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.

Question

Quizplus · Accepted Answer

The statement is correct, as it follows the formula for calculating the cost of external equity capital when the expected dividend growth rate is zero. If the growth rate is not zero, a different formula must be used to calculate the cost of external equity.

If the Expected Dividend Growth Rate Is Zero, Then the Cost