Answer (B) is correct . According to the dividend growth model, the cost of new (external) common equity is the next dividend divided by the net issue proceeds plus the dividend growth rate. Since flotation costs are incurred when issuing new stock, they must be deducted from the market price to arrive at the amount of capital the corporation will actually receive. Accordingly, the $100 selling price is reduced by the $3?discount and the $5 flotation costs to arrive at the $92 to be received for the stock. Because the dividend is not expected to increase in future years, no growth factor is included in the calculation. Thus, the cost of the common stock is 7.6% ($7?dividend ¡Â $92 net issue proceeds).Answer (A) is incorrect because This figure results from failing to subtract the discount and flotation costs.
Answer (C) is incorrect because This figure results from failing to subtract the discount.
Answer (D) is incorrect because This figure would be correct only if the amount received were about $86 or if some growth factor were assumed.
|
The cost of funds from the sale of common stock for Williams, Inc., is
