Rapidly growing companies may have to issue shares to finance capital expenditures. In doing so, they incur

Question:

Rapidly growing companies may have to issue shares to finance capital expenditures. In doing so, they incur underwriting and other issue costs. Some analysts have tried to adjust WACC to account for these costs. For example, if issue costs are 8 percent of equity issue proceeds, and equity issues account for all of equity financing, the cost of equity might be divided by 1 – , 08 = 0.92. This would increase a 15 percent cost of equity to 15/0.92 = 16.3 percent.

Explain why this sort of adjustment is not a smart idea. What is the correct way to take issue costs into account in project valuation?

Cost Of Equity
The cost of equity is the return a company requires to decide if an investment meets capital return requirements. Firms often use it as a capital budgeting threshold for the required rate of return. A firm's cost of equity represents the...