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Answer (B) is correct . Because of flotation costs, DCL will only receive $45 from each new common share issued ($50 ¡Á 90%). The cost of this new common equity issue can thus be calculated as follows: Cost of new common stock = (Next dividend ¡Â Net issue proceeds) + Dividend growth rate ?= ($2.50 ¡Â $45.00) + 0.1 ?= 0.0556 + 0.1 ?= 0.1556<
Answer (A) is incorrect because Assuming next year’s dividend grew by 10% results in 16.11%.
Answer (C) is incorrect because Using the present value of the dividend to be received next year results in 15.05%.
Answer (D) is incorrect because This percentage did not take into account flotation costs.