The cost of retained earnings for Tangshan Mining would be 17.60 percent if the firm just paid a dividend of $4.00, the stock price is $50.00, dividends are expected to grow at 8 percent indefinitely, and flotation costs are $5.00 per share.

Question

Quizplus · Accepted Answer

The cost of retained earnings (k) can be calculated as follows:

k = (D / (P - F)) + g

Where: 
D = dividend per share = $4.00 
P = stock price = $50.00 
F = flotation costs = $5.00 
g = expected dividend growth rate = 8%

Plugging in the values, we get:

k = ($4.00 / ($50.00 - $5.00)) + 0.08 
k = 0.0918 or 9.18%

Therefore, the statement is false. The cost of retained earnings for Tangshan Mining is 9.18%, not 17.60%.

The Cost of Retained Earnings for Tangshan Mining Would Be