Paramount,Inc.just paid a dividend of $2.05 per share,and the firm is expected to experience constant growth of 12.50% over the foreseeable future.The common stock is currently selling for $65.90 per share.What is Paramount's cost of retained earnings using the Dividend Growth Model approach?

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The cost of retained earnings using the Dividend Growth Model approach is calculated as the dividend yield plus the expected growth rate. The dividend yield is the annual dividend per share divided by the current stock price. The expected growth rate is the constant growth rate of the dividends. In this case, the dividend yield is $2.05/$65.90 = 3.11%, and the expected growth rate is 12.50%. Therefore, the cost of retained earnings is 3.11% + 12.50% = 16.00%.