A firm has common stock with a market price of $100 per share and an expected dividend of $5.61 per share at the end of the coming year. A new issue of stock is expected to be sold for $98, with $2 per share representing the underpricing necessary in the competitive capital market. Flotation costs are expected to total $1 per share. The dividends paid on the outstanding stock over the past five years are as follows:
YearDividend
1$ 4.00
24.28
34.58
44.90
55.24
The cost of this new issue of common stock is
A) 5.8 percent.
B) 7.7 percent.
C) 10.8 percent.
D) 12.8 percent.
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