KayCee Manufacturing 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
A) 26.41%.
B) 20.09%.
C) 19.63%.
D) 17.55%.

Question

Quizplus · Accepted Answer

The cost of new common stock can be calculated using the formula: Cost = (D1 / (P0 - F)) + g, where D1 is the expected dividend next year ($3.50 * 1.10 = $3.85), P0 is the current stock price ($40), F is the flotation cost ($4), and g is the growth rate (10% or 0.10). Substituting these values gives: Cost = ($3.85 / ($40 - $4)) + 0.10 = 0.2009 or 20.09%.

KayCee Manufacturing Company Paid a Dividend Yesterday of $3