What formula represents the cost of external equity?

The correct formula for the cost of external equity, represented as Knc, is indeed Knc = D1/NPo + g. This formula provides a way to calculate the return that equity investors expect to earn on their investment.

In this formula, D1 symbolizes the expected dividend per share one year from now, NPo represents the current price of the stock, and g is the growth rate of dividends. When you divide the expected dividend (D1) by the current stock price (NPo), you obtain the dividend yield, which reflects the income generated from owning the stock. By adding the growth rate (g) to this dividend yield, the formula incorporates not only the returns from dividends but also the anticipated growth of those dividends. This effectively captures the total expected return on equity, which is essential for investors when evaluating their investments in relation to the company's performance and market conditions.

This understanding highlights why the other formulas do not represent the accurate calculation for the cost of external equity, as they either misstate the relationship between the components or do not correctly reflect investors' return expectations.