Sentry Manufacturing paid a dividend yesterday of $5 per share (D0 = $5).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 is

Question

Quizplus · Accepted Answer

To calculate the cost of retained earnings (rs), we can use the following formula:

rs = (D1 / P0) + g

where D1 is the expected dividend next year, P0 is the current stock price, and g is the expected growth rate in dividends.

First, we need to calculate D1:

D1 = D0 x (1 + g) 
D1 = $5 x (1 + 0.08) 
D1 = $5.40

Next, we can plug in the values for D1, P0, and g:

rs = ($5.40 / $29) + 0.08 
rs = 0.1862 + 0.08 
rs = 0.2662 or 26.62%

Therefore, the cost of retained earnings for Sentry Manufacturing is 26.62%.

Sentry Manufacturing Paid a Dividend Yesterday of $5 Per Share