Adventure Outfitter Corp.can sell common stock for $27 per share and its investors require a 17% return.However,the administrative or flotation costs associated with selling the stock amount to $2.70 per share.What is the cost of capital for Adventure Outfitter if the corporation raises money by selling common stock?

Question

Quizplus · Accepted Answer

The cost of capital is calculated as the required return minus the flotation costs. 
Required return = 17%
Flotation costs as a percentage of sale price = (2.70/27) x 100 = 10%
Therefore, cost of capital = 17% - 10% = 7%
Cost of capital as a percentage of sale price = (7/90) x 100 = 7.78%
Cost of capital as a percentage of purchase price = 7.78% x (1-0) = 7.78%
Cost of capital as a percentage of net proceeds = 7.78% x (1- 0.10) = 7.78% x 0.9 = 6.998% ≈ 7.00%
Hence, the closest option among the given choices is option B) 18.89%