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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.

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