Tip Top Hats (TTH) is expected to grow at a 4 percent rate for as long as it is in business. Currently the company’s common stock is selling for $34 per share. The most recent dividend paid by TTH was $4.25 per share. If new common stock is issued, TTH will incur flotation costs equal to 8.5 percent. (a) What is the company’s cost of retained earnings? (b) What is its cost of new common equity?

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A:

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