Financial Management
A firm's stock is selling for $85, Dividend yield=5%. A 7% growth rate is expected for the common stock. The firm's tax rate is 32%. (question) What is the firm's cost of retained earnings?
a)8.16%
b)12.00%
c)12.35%
d)cannot be determined
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Answers
C) 12.35%. The cost of retained earnings is equal to the required rate of return (r) plus the growth rate (g) multiplied by (1-t) (where t is the tax rate). In this case, r = 5%, g = 7%, and t = 32%. Therefore, the cost of retained earnings is 12.35%.
