Question

Sentry Manufacturing paid a dividend yesterday of$5 per share (DO = $4). The dividend is expected to grow at a constant rate of 8% per year. The price of Sentry Manufacturing's stock today is $29 per share. If Sentry Manufacturing decides to issue new common stock, flotation costs will equal $2.50 per share. Sentry Manufacturing's marginal tax rate is 35%. Based on the above information, the cost of retained earnings isa. 24.12%b. 31.4%c. 28.38%d. 26.62%

Answer 1

d. 26.62%

Step-by-step explanation:

The formula to compute the cost of the retained earning is shown below:

Current Price = Current dividend × (1 + growth rate) ÷ Retained earning - growth rate

$29 = $5 × (1 + 0.08) ÷ (Retained earning - 0.08)

$ 29 = $5 × 1.08 ÷ (Retained earning - 0.08)

By solving this equation, the cost of retained earning would be 26.62%

All other information which is given is not relevant. Hence, ignored it