Allison Engines Corporation Has Established a Target Capital Structure of 40

Multiple Choice

Allison Engines Corporation has established a target capital structure of 40 percent debt and 60 percent common equity.The firm expects to earn $600 in after-tax income during the coming year,and it will retain 40 percent of those earnings.The current market price of the firm's stock is P₀ = $28;its last dividend was D₀ = $2.20,and its expected dividend growth rate is 6 percent.Allison can issue new common stock at a 15 percent flotation cost.What will Allison's marginal cost of equity capital (not the WACC) be if it must fund a capital budget requiring $600 in total new capital?

A) 15.8%
B) 13.9%
C) 7.9%
D) 14.3%
E) 9.7%