ABC has the following market value capital structure, shown below, which is considered to be optimal. The firm has no preferred stock. Debt $400,000 Equity $600,000 New bonds currently have a 10% coupon rate and ABC's stock sells for $20 per share. The expected growth rate in dividends is 8 percent. The corporate tax rate is 40 percent and the firm net income was $5 million. Finally, the firm paid 20% of its earning out as dividends.

If the flotation cost is 10%, what is the new cost of capital if the firm raises external equity?

Answer rating: 100% (QA)

To calculate the new cost of capital if the firm raises external equity we need to consider the flot... View the full answer