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Cost of the newly issued stock

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Roto Roofing Corp. just paid a dividend of $1.85. This dividend is expected to grow at a constant annual ratae of 3% per year. Roto Roofing's common stock is currently selling for $12.50. The firm can sell new stock at this price subject to floatation costs of 15%. What will the cost of the newly issued stock be?

a.) 17.8%

b.) 16.2%

c.) 18.5%

d.) 19.7%

e.) 20.9%

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Solution Summary

This solution explains how to calculate the cost of the newly issued stock.

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Using the dividend discount model
Cost of new equity = D1/(P0-F) + ...

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