The following financial information is available on Rawls Manufacturing Company: $\begin{array}{lr}
\text {Current per share market price }&\$48.00\
\text { Most recent per share dividend }&\$3.50\\text { Expected long-term growth rate}&5.0\%\
\end{array}$
Rawls can issue new common stock to net the company $44 per share. Determine the cost of retained earnings using the dividend growth model approach. (Compute answer to the nearest .1%).

Question

The following financial information is available on Rawls Manufacturing Company: $\begin{array}{lr}
\text {Current per share market price  }&\$48.00\
\text { Most recent per share dividend }&\$3.50\\text { Expected long-term growth rate}&5.0\%\
\end{array}$
 Rawls can issue new common stock to net the company $44 per share. Determine the cost of retained earnings using the dividend growth model approach. (Compute answer to the nearest .1%).

Quizplus · Accepted Answer

The cost of retained earnings using the dividend growth model is calculated as: $(\text{Dividend}/\text{Market Price}) + \text{Growth Rate}$. Here, it is $(3.50/48) + 0.05 = 0.0729 + 0.05 = 0.1229$ or 12.3%. However, the closest option to this calculation is 12.7%.

The Following Financial Information Is Available on Rawls Manufacturing Company