Question
In this chapter we are looking at the different costs of debt and equity to a firm. In the textbook the cost of equity is
In this chapter we are looking at the different costs of debt and equity to a firm. In the textbook the cost of equity is just the cost of dividends and equity flotation costs to shareholders. However, in many early stage ventures we do not offer dividends - we plow all the money right back into growth. This is one of the primary reasons why Amazon was not profitable for so many years.
(1) So, in this case, is the cost of equity zero? What are you really buying as an investor? What is the real cost of selling equity for the entrepreneur or existing owner(s) of the business (think Shark Tank)?
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