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 $$450,000.$ To do so$,$ it will have

to issue new common stock and will incur a flotation cost of $2\mathrm{.}00\%.$ 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 $$33\mathrm{.}35$ per share, and is expected to pay a per$-$share dividend of $$1\mathrm{.}36$ at the end of the year.

The company's earnings' and dividends' growth rate are expected to grow at the constant rate of $8\mathrm{.}70\%$ into the foreseeable future. If White Lion

expects to incur flotation costs of $3\mathrm{.}750\%$ 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$.\text{'}$s addition to earnings for this year is expected to be $$745,000.$ Its target capital structure consists of $35\%$

debt, $5\%$ preferred, and $60\%$ equity. Determine Sunny Day Manufacturing Company's retained earnings breakpoint:

$$1,241,667$

$$1,117,500$

$$1,490,000$

$$1,427,917$