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A Company's last dividend was $1.35. Its dividend growth rate is expected to be constant at...

A Company's last dividend was $1.35. Its dividend growth rate is expected to be constant at 6.0% forever and the stock price is $40. The flotation cost on any new stock issue will be 10%. The company’s tax rate is 40%. What is cost of retained earnings for this company?

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Answer #1
Computation of cost of retained earning
Cost of retained earning = Expected dividend next year / Price today + Growth rate
Expected dividend next year = 1.35*106%
1.431
Price today = 40
Growth rate = 6%
Cost of retained earning = 1.431/40+6%
9.58%
ans = 9.58%
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