Expected cash dividends are $4.50,the dividend yield is 8%,flotation costs are 5%,and the growth rate is 4%.Compute cost of the new common stock.

Question

Quizplus · Accepted Answer

The formula for cost of new common stock is:

Cost of New Common Stock = (Expected Dividends / Net Proceeds) + Growth Rate

First, we need to calculate the net proceeds after flotation costs:

Net Proceeds = (1 - Flotation Costs) = (1 - 0.05) = 0.95

Next, we can plug in the given values into the formula:

Cost of New Common Stock = ($4.50 / 0.95) + 0.04 = $4.74 + 0.04 = 0.1263 or 12.63%

Therefore, the best choice is B.

Expected Cash Dividends Are $4