Question

Grandview Inc. will issue new common stock to finance an expansion. The existing common stock just paid a $1.50 dividend, and dividends are expected to grow at a constant rate 8% indefinitely. The stock sells for $45, and flotation expenses of 5% of the selling price will be incurred on new shares. What is the cost of retained earnings for Grandview

Answer 1

Answer: 11.79%

Step-by-step explanation:

Cost of Retained earnings is calculated by the formula;

= (Next dividend / ( Price - Net price) ) + growth rate

= ((1.50 * 1.08) /( 45 - (45 * 5%) ) + 8%

= 11.79%