Problem:

Keys Manufacturing Company paid a dividend yesterday of $1.50 per share (D0=$1.50). The dividend is expected to grow at a constant rate of 7% per year. The price of Key's common stock today is $19 per share. If Keys decides to issue new common stock, flotation cost will equal $1.00 per share. Keys' marginal tax rate is 35%. Based on the above information, the cost of retained earnings is:

A) 8.52 %

B) 12.38%

C) 15.45%

D) 14.89%

Note: Please provide full description.