Problem:
Chicago Paints Corporation has a target capital structure of 40 percent debt and 60 percent common equity. The company expects to have $600 of after-tax income during the coming year, and it plans to retain 30 percent of its earnings. The current stock price is Po = $30, the last dividend paid was Do = $2.00, and the dividend is expected to grow at a constant rate of 7 percent. New stock can be sold at a flotation cost of F = 25%.
Required:
Question: What will Chicago Paints' marginal cost of equity capital be if it raises a total of $500 of new capital?
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