The key step for this problem is to find what D1 is before applying Gordon model to calculate both the cost of retained earnings and the cost of new equity
ABC corporation expects to have earnings before interests and taxes during the coming year of 1,200,000, and it expects its earnings and dividends to grow indefinitely at a constant annual rate of 12 percent. the firm has 5,000,000 of debt outstanding bearing a coupon interest rate of 8.25 percent, and it has 100,000 shares of common stock outstanding. historically, Becker has paid 55 percent of net earnings to common shareholders in the form of dividends. the current price of Becker's common stock is $42, but it would incur a 9 percent flotation cost if it were to sell new stock. the firm's tax rate is 40 percent. (a) what is the firm's cost of retained earnings (internal equity) (b) what is the firm's cost of new equity (external equity).