(Cost of equity) the common stock for the Bestsold Corporation

| June 5, 2016

Question
(Cost of equity) the common stock for the Bestsold Corporation sells for $57. If a new issue is sold, the flotation costs are estimated to be 9 percent. The company pays 70 percent of its earnings in dividends, and a $4.20 dividend was recently paid. Earnings per share 6 years ago were $4.00. Earnings are expected to continue to grow at the same annual rate in the future as during the past 6 years. The firm’s marginal tax rate is 35 percent. Calculate the cost of (a) internal common equity and (b) external common equity.

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