Kelly Corporation will issue new common stock to finance an expansion.The existing common stock just paid a $1.50 dividend,and dividends are expected to grow at a constant rate 8% indefinitely.The stock sells for $45,and flotation expenses of 5% of the selling price will be incurred on new shares.What is the cost of new common stock be for Kelly Corp.?
A) 11.33%
B) 11.51%
C) 11.60%
D) 11.79%
E) 12.53%

Question

Quizplus · Accepted Answer

The cost of new common stock can be calculated using the formula: Cost of new equity = (D1 / (P0 * (1 - F))) + g, where D1 is the expected dividend next year ($1.50 * 1.08 = $1.62), P0 is the current stock price ($45), F is the flotation cost (5% or 0.05), and g is the growth rate (8% or 0.08). Plugging in the values: Cost of new equity = ($1.62 / ($45 * (1 - 0.05))) + 0.08 = 11.79%.

Kelly Corporation Will Issue New Common Stock to Finance an Expansion.The