Velma and Daphne Productions is estimating the weighted average cost of capital (WACC). They have several pieces of data to consider. The firm pays 60 percent of its earnings out in dividends. The return on equity (ROE) is 16 percent. Last year’s earnings were $4.00 per share and the dividend was just paid to shareholders. The current price of shares is $35.00. If the firm must issue new shares of common stock, they must pay a flotation cost to the investment bankers of 6 percent. The firm’s optimal capital structure includes 10 percent preferred stock, 40 percent debt and 50 percent equity. They can sell additional bonds at a rate of 9 percent. The cost of issuing new preferred stock is 13 percent. The firm’s marginal tax rate is 40 percent. The cost of issuing retained earnings and new common shares is closest to : Cost of retained earnings Cost of new common stock()①A. 13.3%13.7% ②B. 13.7%14.2% ③C. 13.3%14.2%

A. ①

B. ②

C. ③