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NEW QUESTION: 1
Martin Corporation's common stock is currently selling for $50 per share. The current dividend is $2.00 per share. If dividends are expected to grow at 6 percent per year and if flotation costs are 10 percent, then what is the firm's cost of retained earnings and what is its cost of new common stock?
A. 9.31%; 9.86%
B. 10.24%; 10.71%
C. 11.38%; 10.71%
D. 10.71%; 10.24%
E. 10.24%; 11.38%
Cost of retained earnings:
k(s) = $2.12/$50 + 0.06 = 10.24%.
Cost of new common equity:
k(e) = $2.12/($50(1-.10)) + 0.06 = 10.71%.
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