Asian Trading Company paid a dividend yesterday of $5 per share (D₀= $4).The dividend is expected to grow at a constant rate of 8% per year.The price of Asian Trading Company's stock today is $29 per share.If Asian Trading Company decides to issue new common stock,flotation costs will equal $2.50 per share.Asian Trading Company's marginal tax rate is 35%.Based on the above information,the cost of retained earnings is

Question

Quizplus · Accepted Answer

The cost of retained earnings is the same as the cost of equity, which can be calculated using the dividend growth model:

Ke = (D1 / P0) + g

Where:
D1 = next year's dividend = $5 x (1 + 8%) = $5.40
P0 = current stock price = $29
g = dividend growth rate = 8%

Ke = ($5.40 / $29) + 8% = 26.62%

Therefore, the cost of retained earnings for Asian Trading Company is 26.62%.

Asian Trading Company Paid a Dividend Yesterday of $5 Per