Seafood Products Corp.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) is calculated using the Gordon Growth Model: (D1/P0) + g = (2.60/20) + 0.08 = 0.13 + 0.08 = 21.00%. The cost of external equity (new common stock) accounts for flotation costs: (D1/(P0*(1-f))) + g = (2.60/(20*(1-0.15))) + 0.08 = 0.153 + 0.08 = 23.29%.