Question
Southern Corporation has a capital structure of 40% debt and 60% common equity. This capital structure is expected not to change. The firm's tax rate
Southern Corporation has a capital structure of 40% debt and 60% common equity. This capital structure is expected not to change. The firm's tax rate is 21%. The firm can issue the following securities to finance capital investments:
Debt: Capital can be raised through bank loans at a pretax cost of 7.2%. Also, bonds can be issued at a pretax cost of 8.1%.
Common Stock: Retained earnings will be available for investment. In addition, new common stock can be issued at the market price of $84. Flotation costs will be $3 per share. The recent common stock dividend was $4.52. Dividends are expected to grow at 6% in the future.
What is the cost of external equity?
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started