The common stock for Hightower Corporation currently sells for $62. If a new issue is sold, the flotation costs will be 6 percent. The company pays 50 percent of its earnings in dividends (and expects to continue to do so), and a $4 dividend was recently paid. Earnings per share 5 years ago were $5. Earnings are expected to continue to grow at the same rate as during the past 5 years. The firm's marginal tax rate is 30 percent. Calculate the cost of (a) internal equity and (b) external equity.

The common stock for Hightower Corporation currently sells for $62. If a new issue is sold, the flotation costs will be 6 percent. The company pays 50 percent of its earnings in dividends (and expects to continue to do so), and a $4 dividend was recently paid. Earnings per share 5 years ago were $5. Earnings are expected to continue to grow at the same rate as during the past 5 years. The firm's marginal tax rate is 30 percent. Calculate the cost of (a) internal equity and (b) external equity.

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter14: Capital Structure Management In Practice

Section: Chapter Questions

Problem 9P

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Question

The common stock for Hightower Corporation currently sells for $62. If a new issue is sold, the flotation costs will be 6 percent. The company pays 50
percent of its earnings in dividends (and expects to continue to do so), and a $4 dividend was recently paid. Earnings per share 5 years ago were $5.
Earnings are expected to continue to grow at the same rate as during the past 5 years. The firm's marginal tax rate is 30 percent. Calculate the cost of (a)
internal equity and (b) external equity.

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