In calculating the cost of new common stock using the constant dividend growth model, it is important that the __________ are subtracted from the price of the stock.
A) flotation costs
B) par value
C) cost of retained earnings
D) proceeds of the sale

Question

Quizplus · Accepted Answer

Flotation costs, which are the expenses incurred in the process of issuing new securities, should be subtracted from the price of the stock when calculating the cost of new common stock using the constant dividend growth model. This is because these costs are not directly related to the underlying earning power of the company and therefore reduce the net proceeds available to the company.

In Calculating the Cost of New Common Stock Using the Constant