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Unformatted text preview: urrently selling for $15.65. What is our cost of equity? Using SML: Ks = 6% + 1.5(9%) = 19.5% Using DGM: Ks = [2(1.06) / 15.65] + .06 = 19.55% Estimating the Cost of Equity Estimating the Cost of Equity What (if) company raises capital by What (if) company raises capital by issuing new common stock ? Calculate Cost of equity using DGM When a company issues new common stock they also have to pay flotation costs to the underwriter. Flotation costs depend on the risk of the firm and the type of capital being raised. k s(SEO) D 0 (1 + g) = +g P0 (1 - F) Example: Given D0 = $4.19, P0 = $50, Example: Given D and g = 5% If issuing new common stock incurs a flotation cost of 15% of the proceeds...
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