Jones Distributing 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 Jones Distributing if the corporation raises money by selling common stock?
A) 27.00%
B) 18.89%
C) 18.33%
D) 17.00%

Question

Quizplus · Accepted Answer

The cost of capital for Jones Distributing can be calculated using the following formula:
Cost of capital = (Selling price - Flotation costs) / Required return
= ($27 - $2.70) / 17%
= $24.30 / 17%
= 0.1789 or 18.89%
Therefore, the cost of capital for Jones Distributing if the corporation raises money by selling common stock is 18.89%. The best choice is B).