Cost of New Equity Calculator
Issuing new shares is never free money. Underwriting spreads, legal bills, and registration costs, collectively called flotation costs, mean the company keeps less than the issue price for every share it sells. The cost of new equity is the return the company must earn on those reduced proceeds to keep new shareholders whole, and it is always higher than the cost of spending profits it already has.
This calculator applies the Gordon Growth Model adjusted for flotation costs. Use direct mode if you already know the net proceeds per share, or flotation mode if you know the issue price and the flotation percentage. Flotation mode also prices the retained earnings alternative alongside, so the cost of issuing is stated as an exact premium, not a hunch.
The Gordon Growth Model assumes dividends grow at one constant rate indefinitely. It suits mature, stable dividend payers and should not be stretched onto firms with irregular payouts.
Quick Answer
How to use the cost of new equity calculator
Pick the tab that matches the figures you have. Net Proceeds Known is the short path: expected dividend per share, the net proceeds the company keeps per share, and the dividend growth rate. Issue Price + Flotation % is the fuller path: dividend, issue price, flotation percentage, and growth rate, and the tool derives net proceeds itself.
Either way the headline is the cost of new equity as a percentage. The flotation path adds the rows that matter for decisions: the cost of retained earnings for the identical dividend stream, and the flotation premium, which is the difference. That premium is the number that belongs in a WACC build for a project funded by a new issue, and it is the number most rival tools never show.
The formula: Gordon Growth Model, adjusted for flotation
The dividend discount logic is simple: a share is worth its future dividends, so the return shareholders require is the dividend yield plus the growth they expect. Flotation changes only the price the company effectively receives.
where D1 is next year’s expected dividend, P is the issue price, F is flotation cost as a decimal, and g is the constant dividend growth rate.
With net proceeds already known: cost = (D1 / net proceeds) + g
This is the treatment taught in standard corporate finance texts such as Ross, Westerfield and Jordan and presented in OpenStax Principles of Finance: flotation reduces the denominator, never the dividend. It is also why the cost of new equity sits above the cost of retained earnings in every textbook ordering of funding costs, and why companies exhaust internal funds before issuing, a pattern formalized in pecking order theory. Issuance also has a regulatory paper trail; the SEC’s investor education material on investment risk is a plain-language starting point for what new shareholders are pricing when they demand that return.
Worked example: a $50 issue with 4% flotation
The flotation tab is pre-filled with the example, so you can reproduce it exactly. Issue price $50.00, flotation 4%, expected dividend $2.40, growth 5%.
Net proceeds: $50.00 x (1 – 0.04) = $48.00 per share. The other $2.00 is the cost of issuing.
Cost of new equity: ($2.40 / $48.00) x 100 + 5 = 5.00 + 5 = 10.00%.
Retained earnings comparison: ($2.40 / $50.00) x 100 + 5 = 4.80 + 5 = 9.80%. Flotation premium: 0.20 percentage points.
The premium looks small until it is weighted into a capital structure and applied to a large project. On a $200 million expansion funded half by a new issue, pricing equity at 9.80% instead of 10.00% understates the annual required return on the equity slice by about $200,000, every year, for the life of the project appraisal. The same funding conversation, one instrument over, is what the cost of redeemable debt calculator handles for debt that will be redeemed at a premium, and founders splitting ownership rather than selling shares will want the founder equity calculator instead.
What competing calculators miss
The best-known rival tools take the issue price and flotation percentage and return a single percentage. That number is correct as far as it goes, but it cannot answer the question a finance team actually asks, which is how much more issuing costs than using the cash already on hand. Without the retained earnings comparison, the flotation premium stays invisible, and WACC models quietly pick up whichever equity cost was nearest.
Most also force one input style. Analysts who already hold net proceeds from an underwriter’s term sheet have to reverse-engineer a flotation percentage to use them. This page keeps both paths: direct net proceeds for term-sheet work, and the full price-plus-flotation build for planning, with the premium stated in percentage points. Once the equity cost is settled, the company valuation calculator is the natural next step, since the discount rate and the valuation move together.
Where the model breaks, stated plainly
The Gordon Growth Model is only as good as its constant growth assumption. A company whose dividends jump around, a firm in a high-growth phase where g approaches the required return, or a non-dividend payer will produce nonsense or nothing at all. Flotation percentages also shrink as issues grow, because registration and legal work is partly fixed, so a single percentage is an approximation for very large raises. Use the result as the equity input it is designed to be, cross-check it against CAPM when the stakes justify it, and do not present the second decimal place as more certain than the assumptions underneath it.
Frequently Asked Questions
It is the return a company must earn on money raised by issuing new shares to satisfy the new shareholders, after accounting for flotation costs. Because issuance costs shrink the proceeds the company actually keeps, the required return on new equity is higher than on retained earnings for the same dividend stream.
The costs of issuing new securities: the underwriting spread, legal and accounting fees, registration, printing, and listing charges. For seasoned common stock issues they commonly run about 2% to 7% of the amount raised, and they are higher, proportionally, for small issues because many of the costs are fixed.
Both sources must deliver the same dividend yield and growth to shareholders. The difference is the denominator: retained earnings are used at full value, while new shares only contribute their net proceeds after flotation. A smaller amount of usable capital must support the same dividend, so the percentage cost rises. The flotation mode above puts an exact figure on the gap.
That dividends grow at a single constant rate forever, and that the required return exceeds that growth rate. It is a reasonable lens for mature companies with stable payout policies. For firms with no dividends, supernormal growth phases, or erratic payouts, a model like CAPM or a multi-stage dividend model fits better.
Grow it once: D1 = D0 x (1 + g). If the last dividend was $2.27 and growth is 5%, next year’s expected dividend is about $2.38. Enter that figure as the expected dividend, not the dividend just paid, or the result will understate the cost.
WACC blends the cost of each funding source by its market-value weight. When a project is specifically financed with a new share issue, the new equity cost from this calculator, flotation included, is the equity figure to weight in, rather than the cheaper retained earnings cost. Mixing the two up understates the hurdle rate for the project.
CAPM estimates the cost of equity from market risk and does not need dividends, so it suits non-dividend payers. It also does not, by itself, capture flotation. For a dividend-paying company comparing a new issue with retained earnings, the flotation-adjusted Gordon model answers the funding question directly, and many analysts cross-check the two against each other.
From the price. Flotation is a cost of raising the capital, not of paying the dividend, so it reduces net proceeds per share in the denominator: cost = D1 / (P x (1 – F)) + g. Subtracting it from the dividend would understate the cost and misstate what issuance actually does.
Add This Calculator to Your Website
References
- OpenStax, Rice University, “Principles of Finance”, the cost of capital chapters covering the dividend growth model and flotation cost adjustments. OpenStax: Principles of Finance. Accessed October 2026.
- Ross, Westerfield and Jordan, “Fundamentals of Corporate Finance”, the standard textbook treatment of the cost of new equity versus retained earnings, and the source text for the formula used here. Accessed October 2026.
- US Securities and Exchange Commission, Investor.gov, “What Is Risk?”, plain-language background on the returns investors require for bearing equity risk. Investor.gov: What Is Risk?. Accessed October 2026.
- Aswath Damodaran, NYU Stern School of Business, cost of capital resources and data sets used to cross-check equity cost assumptions. Damodaran Online: Cost of Capital Resources. Accessed October 2026.
- Eugene F. Brigham and Michael C. Ehrhardt, “Financial Management: Theory and Practice”, treatment of flotation costs inside the weighted average cost of capital. Accessed October 2026.