Sentry Manufacturing paid a dividend yesterday of$5 per share (DO = $4). The dividend is expected to grow at a constant rate of 8% per year. The price of Sentry Manufacturing's stock today is $29 per share. If Sentry Manufacturing decides to issue new common stock, flotation costs will equal $2.50 per share. Sentry Manufacturing's marginal tax rate is 35%. Based on the above information, the cost of retained earnings isa. 24.12%b. 31.4%c. 28.38%d. 26.62%

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Business

Nico Oneill

31 January, 17:07

Sentry Manufacturing paid a dividend yesterday of$5 per share (DO = $4). The dividend is expected to grow at a constant rate of 8% per year. The price of Sentry Manufacturing's stock today is $29 per share. If Sentry Manufacturing decides to issue new common stock, flotation costs will equal $2.50 per share. Sentry Manufacturing's marginal tax rate is 35%. Based on the above information, the cost of retained earnings isa. 24.12%b. 31.4%c. 28.38%d. 26.62%

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Matteo Decker · Answer 1

d. 26.62%

Explanation:

The formula to compute the cost of the retained earning is shown below:

Current Price = Current dividend * (1 + growth rate) : Retained earning - growth rate

$29 = $5 * (1 + 0.08) : (Retained earning - 0.08)

$ 29 = $5 * 1.08 : (Retained earning - 0.08)

By solving this equation, the cost of retained earning would be 26.62%

All other information which is given is not relevant. Hence, ignored it