Problem:
Johnson Production Company paid a dividend yesterday of $3.50 per share. The dividend is expected to grow at a constant rate of 10% per year. The price of Johnson's common stock today is $40 per share. If Johnson decides to issue new common stock, flotation costs will equal $4.00 per share. Johnson's marginal tax rate is 35%.
Required:
Question: Based on the above information, what is the cost (r) of new common stock?
Note:Provide specific examples to support your answers.