a). Cost of new stock capital = [D1 / {P0 * (1 - F)}] + g
= [$2.50 / {$21 * (1 - 0.041)}] + 0.042
= 0.1241 + 0.042 = 0.1661, or 16.61%
Flotation cost adjustment = Cost of new stock capital - Cost of equity without flotation adjustment
= 16.61% - 12% = 4.61%
b). Cost of new common equity = Cost of old common equity + Flotation cost adjustment
= 11.5% + 4.61% = 16.11%
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