Detailed Answer
Answer (D) is correct. The next dividend that Mackinaw will pay is $2.43 ($2.25 × 1.08). The net issue proceeds are $35.85 ($38 ÷ 1.06) after taking the flotation costs into account. Therefore, the cost of capital is 14.8% [($2.43 ÷ $35.85) + .08].