ABC is issuing new common stock at a market price of $22.  Dividends
last year were $1.15 per share and are expected to grow at a rate of
7%.  Floatation costs will be 5% of the market price.  What is ABC's
cost of external equity?

Hi k9queen!!

The market price (P0) is $22 .
The expected growth (g%) is 7% (g = 0.07)
Dividends of the last year (D0) was $1.15 .
Then the Dividends for the present year (D1) are:
D1 = D0 * (1+g) = $1.15 * 1.07 = $1.2305 .

The Flotation cost (F%) is 5% of the market price, then the Net Price
after flotation costs (NP0) is:
NP0 = P0 * (1-F) = $22 * 0.95 = $20.9

Now we can calculate the ABC's cost of external equity:

Ke = (D1 / NP0) + g = (1.2305 / 20.9) + 0.07 = 0.1289 = 12.89%

I hope this helps you.
If you need a clarification, please post a request for it.

Regards.
livioflores-ga

Very clear explanations!