A Firm Has Common Stock with a Market Price of $100

question 86

Multiple Choice

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: 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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Definitions:

Pauper Labor Fallacy

The incorrect belief that importing goods from countries with lower wage levels harms the economy of the importing country.

Opportunity Cost

Giving up the chance for gain from multiple possibilities by choosing a specific alternative.

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A type of cereal grain that is grown worldwide and is a staple food in many regions, used to make products like bread, pasta, and flour.

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