the expected dividend growth rate is zero, then the cost of external equity capital raised by issuing new common stock (re) is equal to the cost of equity capital from retaining earnings (rs) divided by one minus the percentage flotation cost required to sell the new stock, (1 - F) If the expected growth rate is not zero, then the cost of external equity must be found using a different formula.

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Quizplus · Accepted Answer

This statement is true. When the expected dividend growth rate is zero, the formula for the cost of external equity capital raised by issuing new common stock simplifies to re = rs / (1 - F). However, if the expected dividend growth rate is not zero, then the cost of external equity must be found using the Gordon growth model or another appropriate formula.

The Expected Dividend Growth Rate Is Zero, Then the Cost