The most recent dividend was $2.50, the anticipated constant growth rate is 4%, the selling price today is $28 per share, and flotation costs are 18%. What is the cost of retained earnings ?

Question

Quizplus · Accepted Answer

The cost of retained earnings can be calculated using the Gordon Growth Model (Dividend Discount Model): Cost of Retained Earnings = (D1 / P0) + g, where D1 is the expected dividend next year, P0 is the current price, and g is the growth rate. D1 = $2.50 * (1 + 0.04) = $2.60. P0 = $28. Therefore, Cost of Retained Earnings = ($2.60 / $28) + 0.04 = 0.133 or 13.3%.

The Most Recent Dividend Was $2