Question

Johnson Production Company paid a dividend yesterday of $3.50 per share. The dividend is expected to grow at a constant rate of 10% per year. The price of KayCee's common stock today is $40 per share. If KayCee decides to issue new common stock, flotation costs will equal $4.00 per share. KayCee's marginal tax rate is 35%. Based on the above information, the cost of new common stock is Select one: a. 19.63%. b. 20.09%. c. 26.41%. d. 17.55%.

Answer 1

correct option is a. 19.63%

Step-by-step explanation:

given data

dividend = $3.50 per share

constant rate = 10% per year

common stock = $40 per share

flotation costs = $4 per share

solution

we know formula that is

cost of retained earnings =
`(Dividend)/(Current price)` + Growth rate

we will ignored Flotation costs in this case

so it will be =
`(3.5 * 1+0.1)/(40)` + 0.1

= 19.63 %

so correct option is a. 19.63%