EXAMPLE

Suppose a firm's stock trades at $$23\mathrm{.}06$ per share and its expected dividend is $$1\mathrm{.}21.$ If the

expected growth rate is $5\mathrm{.}5\%,$ what is the firm's cost of equity?

COST OF NEW COMMON STOCK, $r_e($Section $10-6)$

Flotation costs are the fees charged by investment bankers plus accounting and legal

expenses associated with issuing new shares of common stock. Flotation costs may be

treated as either a transaction dollar amount, or as a percentage cost required to sell new

equity. Using the percentage method, we find that the net price per share received by the

company is determined as $P_0(1-F).$

EXAMPLE

If Allied incurred a flotation cost of $10\%$ for issuing new stock, how much higher would its

cost of equity from new common stock be than its cost of retained earnings?