Sentry Manufacturing paid a dividend yesterday of $5 per share (D₀= $4).The dividend is expected to grow at a constant rate of 8% per year.The price of Sentry Manufacturing's stock today is $29 per share.If Sentry Manufacturing decides to issue new common stock,flotation costs will equal $2.50 per share.Sentry Manufacturing'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 is 28.38%.The cost of new common stock is calculated as follows:Cost of new common stock = (D1 / (P0 - F)) + gwhere:D1 = expected dividend next year = D0 * (1 + g) = $4 * (1 + 0.08) = $4.32P0 = current stock price = $29F = flotation costs = $2.50g = expected constant growth rate = 0.08Plugging in the values, we get:Cost of new common stock = ($4.32 / ($29 - $2.50)) + 0.08 = 28.38%

Sentry Manufacturing Paid a Dividend Yesterday of $5 Per Share