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The DCL Corporation is preparing to evaluate the capital expenditure proposals for the coming year. Because the firm employs discounted cash flow methods of analyses, the cost of capital for the firm must be estimated. The following information for DCL Corporation is provided.
? Market price of common stock is $50 per share.
? The dividend next year is expected to be $2.50 per share.
? Expected growth in dividends is a constant 10%.
? New bonds can be issued at face value with a 13% coupon rate.
? The current capital structure of 40% long-term debt and 60% equity is considered to be optimal.
? Anticipated earnings to be retained in the coming year are $3 million.
? The firm has a 40% marginal tax rate.
If the firm must assume a 10% flotation cost on new stock issuances, what is the cost of new common stock?