Johnson Production Company paid a dividend yesterday of $3.50 per share.The dividend is expected to grow at a constant rate of 10% per year.The price of KayCee's common stock today is $40 per share.If KayCee decides to issue new common stock,flotation costs will equal $4.00 per share.KayCee's marginal tax rate is 35%.Based on the above information,the cost of new common stock is

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The cost of new common stock (re) can be calculated using the dividend discount model (also known as the Gordon growth model) adjusted for flotation costs. The formula for the cost of new common stock is re = (D1 / (P0 - F)) + g, where D1 is the dividend expected next year, P0 is the current price per share, F is the flotation cost per share, and g is the growth rate of dividends.Given:- D0 (the dividend paid yesterday) = $3.50- g (growth rate) = 10% or 0.10- P0 (current price per share) = $40- F (flotation costs per share) = $4First, calculate D1, the dividend expected next year, using D1 = D0 * (1 + g):D1 = $3.50 * (1 + 0.10) = $3.85Then, plug the values into the cost of new common stock formula:re = ($3.85 / ($40 - $4)) + 0.10 = ($3.85 / $36) + 0.10 = 0.1069 + 0.10 = 20.69%However, the correct calculation should be closely examined as the provided options do not include 20.69%. The closest option given is 20.09%, which suggests a possible rounding or calculation discrepancy in the explanation. The correct approach is as described, but the final answer should align with the options provided, indicating a need for careful calculation and consideration of the options available.

Johnson Production Company Paid a Dividend Yesterday of $3