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Builtrite common stock is currently selling for $66 a share and the firm just paid an annual dividend of $3.20 per share. Management believes that dividends and earnings should grow at 9% annually. Based on this, and a marginal tax rate of 34%, what is the cost of common stock (also known as the cost of retained earnings)?

Respuesta :

Answer:

0.143 or 14.3%

Explanation:

Tax does not affect the Cost of common stock (Ke) since Dividend is an item of appropriation and not charge against profit.

Annual dividend, D0 = $3.20 per share

Dividends and earnings should grow, g = 9% annually

Selling price of common stock = $66

[tex]ke=\frac{D0(1+g)}{P0}+g[/tex]

[tex]ke=\frac{3.20(1+0.09)}{66}+0.09[/tex]

[tex]ke=\frac{3.488}{66}+0.09[/tex]

           = 0.053 + 0.09

           = 0.143 or 14.3%

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