The common stock of a AA Corporation has a beta of 1.1. The expected return on the overall market is 10 percent and the risk-free rate of return is 4 percent. The company paid a dividend of $1.50 per share on its common stock during the past year, and the company is expected to maintain a constant 6 percent annual growth rate on its dividend indefinitely. The company’s current stock price is $30 per share and the estimated flotation cost is 10 percent. The company’s cost of newly issued common stock (external equity) is closest to:

 

A.       10.6%

B.        11.3%

C.       11.6%

D.       11.9%

 

如果用CAPM : 4%+6% x 1.1=10.6%

 

if use ddm model with flotation cost：(1.5 x 1.06) / (30x(1-0.1))+6%=11.9%

 

if use ddm model without flotation cost：(1.5 x 1.06) / (30)+6%=11.3%

 

Which one is right???thank you.