Problem:

Common stock: The firm's common stock is currently selling for $50 per share. The dividend expected to be paid at the end of the coming year (2011) is $4.00. Its dividend payments, which have been approximately 60% of earnings per share in each of the past 5 years, were as shown on the following table:

• Year Dividend
• 2010 $3.75
• 2009 3.50
• 2008 3.30
• 2007 3.15
• 2006 2.85

It is expected that to attract buyers, new common stock must be underpriced $5 per share, and the firm must also pay $3 per share in flotation costs. Dividend payments are expected to continue at 60% of earnings.

Requirement:

What is the cost of common stock?

Note: Solve the problem and show all work.