Phillips Enterprises Inc.is expected to pay a dividend of $2.60 next year.Dividends are expected to grow at a constant rate of 8% per year,and the stock price is currently $20.00.New stock can be sold at this price subject to flotation costs of 15%.The company's marginal tax rate is 35%.Compute the cost of internal equity (retained earnings)and the cost of external equity (new common stock),respectively.

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The cost of internal equity (retained earnings) can be calculated using the dividend discount model (Gordon's model), which is $r = \frac{D_1}{P_0} + g$, where $D_1$ is the dividend next year, $P_0$ is the current stock price, and $g$ is the growth rate. Substituting the given values, we get $r = \frac{2.60}{20} + 0.08 = 0.13 + 0.08 = 0.21$ or 21%.The cost of external equity (new common stock) takes into account the flotation costs. The net proceeds from selling new stock are $P_0 \times (1 - \text{flotation cost percentage}) = 20 \times (1 - 0.15) = 17$. The cost of external equity can be calculated as $r_e = \frac{D_1}{P_0 - \text{flotation costs}} + g = \frac{2.60}{17} + 0.08 = 0.1529 + 0.08 = 0.2329$ or 23.29%.