Expected cash dividends are $3.00, the dividend yield is 4%, flotation costs are 4% of price, and the growth rate is 3%. Compute cost of new common stock.

Question

Quizplus · Accepted Answer

The cost of new common stock can be determined using the following formula:

Cost of new common stock = (Dividend yield + growth rate) / (1 - flotation costs)

Substituting the values, we get:

Cost of new common stock = (0.04 + 0.03) / (1 - 0.04) = 0.072, or 7.2%

Therefore, the best choice is B.

Expected Cash Dividends Are $3