CFA Practice Question
A firm seeks to raise capital by selling equity. It can raise $100 million equity, for which it will have to pay the investment bank fees of $2.5 million. It will pay yearly dividends of $4 million on this new equity next year, and these yearly dividends will grow at a perpetual rate of 5.25% per annum. What is the cost of equity for the firm?
A. 4.10%
B. 9.25%
C. 9.35%
Explanation: Cost of Equity = Dividend Yield + Growth Rate = ($4M / ($100M - $2.5M)) + 5.25%
User Contributed Comments 3
| User | Comment |
|---|---|
| CFunder | I thought in the textbook it says we aren't suppose to incorporate floatation costs in the cost of equity.... |
| chantal | See LOS 45 flotation cost. When they are significant ie above 1% they should be reflected |
| neworizon | floatation costs are one-shot, so should not be counted in the firm equity cost. |