Calculate the cost of the new issue of common stock

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ABC firm has common stock with a market price of $110 per share and an expected dividend of $7 per share at the end of the coming year. A new issue of stock is expected to be sold for $96, with $2 per share representing the underpricing necessary in the competitive capital market. Floatation costs are expected to total $1 per share. The dividend growth rate is based on the dividends paid on the outstanding stock over the past 5 years as follows:

Year 1 = $4.00 dividend per share

Year 2 = $4.28 dividend per share

Year 3 = $4.58 dividend per share

Year 4 = $4.90 dividend per share

Year 5 = $5.24 dividend per share

Calculate the cost of the new issue of common stock.

Reference no: EM132607392

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