Last year's dividend was $2.00 and is expected to grow indefinitely at 6%. The stock is selling at $22. The dividend growth model estimates the cost of retained earnings at 15.6%.

Question

Quizplus · Accepted Answer

According to the dividend growth model, the cost of retained earnings is estimated as follows:
Cost of Retained Earnings = (Next year's expected dividend / Current stock price) + dividend growth rate
= ($2.00 x 1.06 / $22) + 6% = 15.6%
Therefore, the statement is true.

Last Year's Dividend Was $2