Murray Motor Company wants you to calculate its cost of common stock. During the next 12 months, the company expects to pay dividends (D1) of $2.00 per share, and the current price of its common stock is $40 per share. The expected growth rate is 3 percent.
a. Compute the cost of retained earnings (Ke).
b. If a $3 flotation cost is involved, compute the cost of new common stock (Kn).