Phillips enterprises inc. is expected to pay a dividend of $2.60 next year. dividends are expected to grow at a constant rate of 8% per year, and the stock price is currently $20.00. new stock can be sold at this price subject to flotation costs of 15%. the company's marginal tax rate is 35%. compute the cost of internal equity (retained earnings) and the cost of external equity (new common stock), respectively. a) 0, 21.00%b) 8.00%, 23.29%c) 21.00%, 23.29%d) 23.00%, 25.48%

Cost of internal equity =21%

Cost of external Equity =23.29%

Explanation:

Using the constant growth model:

if ke is made subject of formula then the cost of internal equity ke is calculated as follows:

= = 21%

If external equity is to be used, that means that the company will have to issue share to get a fresh infection of capital into the company, and is thus likely to face flotation costs. the company will  receive a net of $20 minus flotation costs for every share sold.

If ke is made subject of formula then the cost of external equity ke is calculated as follows:

= = 23.29%

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