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 under pricing 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)