The cost of external equity capital raised by issuing new common stock (re) is defined as follows, in words: "The cost of external equity equals 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)."

Answer the following statement true (T) or false (F)


False

Rationale: ?This statement is true only if the expected growth rate is zero. Here are some illustrative numbers that show that the statement is true if g = 0 but false otherwise.

Positive gZero gPrice$10.00$10.00Dividend$0.50$0.50Growth6.00%0.00%Flotation5.00%5.00%rs = D1/P0 + g11.00%5.00%re = D1/P0(1 ? F) + g11.263%5.263%Equal only if g = zero.rs/(1 ? F)11.579%5.263%

Business

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