Jana wants to show the project managers that if the company raises capital by selling stock, the company doesnt receive all of the money that investors contribute. The project managers want to warn Jana about the common mistakes in estimating the WACC.

1. If investors put up $100,000, and if they expect a 15% return on equity raised as retained earnings, at least how much profits must be generated? If flotation costs are 20% of the investment, then how much cash will the company receive from the investors contributed $100,000? What should be the minimum rate of return of the $100,000 investment? Explain in words why new common stock that is raised externally has a higher percentage cost than equity that is raised internally as retained earnings.

2. What four common mistakes in estimating the WACC should Jana avoid?