5. (Cost of internal equity) Pathos Co.’s common stock is currently selling for $23.80. Dividends paid last year were $0.70. Flotation costs on issuing stock will be 10 percent of market price.

The dividends and earnings per share are projected to have an annual growth rate of 15 percent. What is the cost of internal common equity for Pathos?

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6. (Cost of equity) the common stock for the Bestsold Corporation sells for $58. If a new issue is sold, the flotation costs are estimated to be 8 percent. The company pays 50 percent of its earnings in dividends, and a $4 dividend was recently paid. Earnings per share 5 year ago were $5.00.

Earnings are expected to continue to grow at the same annual rate in the future as during the past 5 years. The firm’s marginal tax rate is 34 percent.

Calculate of (a) internal common equity and (b) external common equity.

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