A firm has common stock with a market price of $100 per share and an expected dividend of $5.61 per share at the end of the coming year. A new issue of stock is expected to be sold for $98, with $2 per share representing the underpricing necessary in the competitive capital market. Flotation costs are expected to total $1 per share. The dividends paid on the outstanding stock over the past five years are as follows:

Year Dividend

1 $ 4.00

2 4.28

3 4.58

4 4.90

5 5.24

The cost of this new issue of common stock is

A) 5.8 percent.

B) 7.7 percent.

C) 10.8 percent.

D) 12.8 percent. (This is the answer, but need the explaination)