### Share to use stockholders money

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The president of Dronavation, Inc. has hired you to determine the firm's cost of debt and cost of equity capital. The stock is currently selling for \$40 a share and the dividend per share is expected to be around \$2. The company has total liabilities of \$16 million and interest expense for the year of \$2 million.

Discuss The president makes the statement that it will cost \$2 per share to use the stockholders' money, so the cost of equity is equal to 5 percent (2/40). Is this correct? How do you respond? The president says to you that if the company owes \$16 million and has only \$2 million in interest, the cost of debt is 12.5 percent (\$2 million / \$16 million). Is this conclusion correct? Explain. Based on his calculations, the president recommends the company increase its use of equity financing, because debt costs 12.5 percent, but equity only costs 5 percent. How do you respond?

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