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 ordinary shares are 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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Quizplus · Accepted Answer

The cost of retained earnings using the Dividend Growth Model approach is calculated as the dividend yield plus the growth rate. The dividend yield is the dividend per share divided by the current stock price, which is $2.05 / $65.90 = 0.0311. The growth rate is 12.50%. Therefore, the cost of retained earnings is 0.0311 + 0.1250 = 0.1600, or 16.00%.