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Syscotec is considering investing in new equipment to serve more customers. You have been asked to determine the required return of Syscotec's common equity, assuming that the firm will raise new equity financing to fund the acquisition of the equipment. Syscotec's beta is 0.75, the expected market risk premium is 7.25% and the risk-free interest rate is 1%.
Flotation costs on any new issue of common equity will be 5% after tax. Based on this information, what is the required return on Syscotec's new common equity? Please show step by step calculations.
A) 6.44%
OR
B) 6.78%
I think it should be a) 6.44%
Flotation should not be used, as rate of return is required.
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