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Sagot :
The firm's cost of external equity raised by issuing new stock is the same as the required rate of return on the firm's outstanding common stock.
This statement is false.
Cost of equity is the rate of return paid out by company to equity investors. A firm uses cost of equity to assess the relative attractiveness of investments which includes both internal projects as well as external acquisition opportunities.
Companies mostly use a combination of equity and debt financing, with equity capital being more expensive.
The cost of equity can be calculated by using either the CAPM known to as Capital Asset Pricing Model or Dividend Capitalization Model used for companies that pay out dividends.
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