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If the expected dividend growth rate is zero, then the cost of external equity capital raised by issuing new common stock (re) is equal to the cost of equity capital from retaining earnings (rs) divided by one minus the percentage flotation cost required to sell the new stock, (1 - F). If the expected growth rate is not zero, then the cost of external equity must be found using a different formula.
a) true
b) false

Respuesta :

jepessoa

Answer:

a) true

Explanation:

[P₀ x (1 - F)] = [Div₀ x (1 + g)] / (Re - g)

if g = 0

[P₀ x (1 - F)] = Div₀ / Re

cost of internal equity ⇒ {Rie x [P₀ x (1 - F)]} / Div₀, but F = 0, so (Rie x P₀) / Div₀

cost of external equity ⇒   {Ree x [P₀ x (1 - F)]} / Div₀

we must equal them:

(Rie x P₀) / Div₀ = {Ree x [P₀ x (1 - F)]} / Div₀   ⇒   Div₀s are cancelled out

Rie x P₀ = {Ree x [P₀ x (1 - F)]}    ⇒   P₀s are cancelled out

Rie = Ree x (1 - F)

Ree = Rie (1 - F)

cost of external equity = cost of internal equity / (1 - F)

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