3. The cost of new common stock

True or False: The following statement accurately describes how firms make decisions related to issuing new common stock.

Taking flotation costs into account will reduce the cost of new common stock.

True: Taking flotation costs into account will reduce the cost of new common stock, because you will multiply the cost of new common stock by 1 minus the flotation costsimilar to how the after-tax cost of debt is calculated.

False: Flotation costs are additional costs associated with raising new common stock.

Sunny Day Manufacturing Company is considering investing in a one-year project that requires an initial investment of $500,000. To do so, it will have to issue new common stock and will incur a flotation cost of 2.00%. At the end of the year, the project is expected to produce a cash inflow of $595,000. The rate of return that Sunny Day expects to earn on its project (net of its flotation costs) is (rounded to two decimal places).

White Lion Homebuilders has a current stock price of $22.35 per share, and is expected to pay a per-share dividend of $1.36 at the end of the year. The companys earnings and dividends growth rate are expected to grow at the constant rate of 5.20% into the foreseeable future. If White Lion expects to incur flotation costs of 5.00% of the value of its newly-raised equity funds, then the flotation-adjusted (net) cost of its new common stock (rounded to two decimal places) should be .

Sunny Day Manufacturing Company Co.s addition to earnings for this year is expected to be $420,000. Its target capital structure consists of 35% debt, 5% preferred, and 60% equity. Determine Sunny Day Manufacturing Companys retained earnings breakpoint:

$840,000

$700,000

$770,000

$1,200,000