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. 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 $550,000. 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 $2.45 at the end of the year. The company's earnings' and dividends' growth rate are expected to grow at the constant rate of 8.70% into the foreseeable future. If White Lion expects to incur flotation costs of 6.50% 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 $745,000. Its target capital structure consists of 50% debt, 5% preferred, and 45% equity. Determine Sunny Day Manufacturing Company's retained earnings breakpoint: $1,655,556 $1,821, 112 $2,069,445 $1,986,667