Managerial Economics 13th Edition by James McGuigan,Charles Moyer,Frederick Harris

Exercise 2

The Gordon Company currently pays an annual common stock dividend of $4.00 per share. Its dividend payments have been growing at a steady rate of 6 percent per year, and this rate of growth is expected to continue for the foreseeable future. Gordon's common stock is currently selling for $65.25 per share. The company can sell additional shares of common stock after flotation costs at a net price of
$60.50 per share. Based on the dividend capitalization model, determine the cost of
a. Internal equity (retained earnings)
b. External equity (new common stock)