Question

A firm's stock is selling for $79. The next annual dividend is expected to be $2.00. The growth rate is 11%. The flotation cost is $7. What is the cost of retained earnings?

Answer 1

Answer: 13.53%

Step-by-step explanation:

The following information can be gotten from the question:

Price of stock, Po = $79

Growth rate, g = 11%%

Dividend, D1 = $2.00

Ks = Unknown

Po =D1/(Ks-g)

Therefore, Ks = g + D1/P0

= 11% + 2.00/79

= 0.11 + 0.0253

= 0.1353

= 13.53%

Floataton cost is not relevant here as it is used only for Issue of stock.