Response to the following problem:
The Stillwater Corporation is evaluating its marginal cost of capital schedule. They presently do not use debt or preferred stock in their capital structure and do not plan to do so in the foreseeable future. Stillwater paid $3.00 in dividends per share on its common stock this year. They expect the dividend to grow at a constant rate of 5% per year into the future. The current price of Stillwater common stock is $30 per share. If they issue new stock, they expect to incur a flotation cost of $1 per share. They expect to generate retained earnings of $1,000,000 during the next period.
a. If they raise $1,000,000, what is the weighted average cost of capital?
b. If they raise $2,000,000, what is the weighted average cost of capital?
c. At what level of new financing does the cost of equity change?