Williamson Manufacturing paid a $2 dividend last year and expects dividends to grow at a constant rate of 7%. The firm's stock is selling at $45 per share and flotation costs on a new issue would be 15%. Calculate Williamson's cost of retained earnings.

Question

Quizplus · Accepted Answer

The cost of retained earnings can be calculated using the Gordon Growth Model: Cost of Retained Earnings = (D1 / P0) + g, where D1 is the expected dividend next year ($2 * 1.07 = $2.14), P0 is the current stock price ($45), and g is the growth rate (7%). So, (2.14 / 45) + 0.07 = 0.0476 + 0.07 = 0.1176 or 11.8%.

Williamson Manufacturing Paid a $2 Dividend Last Year and Expects