A Firm Has Common Stock with a Market Price of $100

Multiple Choice

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: 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