Royal Mediterranean Cruise Line's common stock is selling for $22 per share.The last dividend was $1.20,and dividends are expected to grow at a 6% annual rate.Flotation costs on new stock sales are 5% of the selling price.What is the cost of Royal's new common stock?

Question

Quizplus · Accepted Answer

The cost of new common stock can be calculated using the formula: Cost = (D1 / (P0 * (1 - F))) + g, where D1 is the expected dividend, P0 is the current stock price, F is the flotation cost, and g is the growth rate. Here, D1 = $1.20 * (1 + 0.06) = $1.272, P0 = $22, F = 0.05, and g = 0.06. Plugging in these values gives: Cost = ($1.272 / ($22 * (1 - 0.05))) + 0.06 = 12.09%.

Royal Mediterranean Cruise Line's Common Stock Is Selling for $22