5. 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

False: Flotation costs are additional costs associated with raising 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 cost-similar to how the after-tax cost of debt is calculated. Alpha Moose Transporters is considering investing in a one-year project that requires an initial investment of $500,000. To do so, we 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 $550,000. The rate of return that Alpha Moose expects to earn on its project (net of its flotation costs) is (rounded to two decimal places). Sunny Day Manufacturing Company has a current stock price of $33.35 per share, and is expected to pay a per-share dividend of $2.03 at the end of the year. The company's earnings and dividends' growth rate are expected to grow at the constant rate of 5.20% into the foreseeable future. I Sunny Day expects to incur flotation costs of 3.750% of the value of its newly-raised equity funds, then the flotation-adjusted (net) cost of its new commen stock (rounded to two decimal places) should be Alpha Moose Transporters Co.'s addition to earnings for this year is expected to be $745,000. Its target capital structure consists of 4on debt. 5 preferred, and 55% equity. Determine Alpha Moose Transporters's retained earnings breakpoint: $1,354,545 $1,693,181 $1,490,000 $1,286,818