Answer:
Cost of internal equity =21%
Cost of external Equity =23.29%
Explanation:
Using the constant growth model:
[tex]Po=\frac{D1}{ke-g}[/tex]
if ke is made subject of formula then the cost of internal equity ke is calculated as follows:
[tex]ke=\frac{D1}{Po}+g[/tex] =[tex]\frac{2.60}{20}+0.08[/tex] = 21%
If external equity is to be used, that means that the company will have to issue share to get a fresh infection of capital into the company, and is thus likely to face flotation costs. the company will receive a net of $20 minus flotation costs for every share sold.
[tex]Po(1-f)=\frac{D1}{ke-g}[/tex]
If ke is made subject of formula then the cost of external equity ke is calculated as follows:
[tex]ke=\frac{D1}{Po(1-f)}+g[/tex] = [tex]\frac{2.60}{20(1-0.15)}+0.08[/tex] = 23.29%
