Kinslow Manufacturing Company paid a dividend yesterday of $2.50 per share. The dividend is expected to grow at a constant rate of 5% per year. The price of Kinslow's common stock today is $25 per share. If Kinslow decides to issue new common stock, flotation costs will equal $2.00 per share. Keys' marginal tax rate is 34%. Based on the above information, the cost of retained earnings is;

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6 May, 23:32

Kinslow Manufacturing Company paid a dividend yesterday of $2.50 per share. The dividend is expected to grow at a constant rate of 5% per year. The price of Kinslow's common stock today is $25 per share. If Kinslow decides to issue new common stock, flotation costs will equal $2.00 per share. Keys' marginal tax rate is 34%. Based on the above information, the cost of retained earnings is;

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Corey Huerta · Answer 1

15.50%

Explanation:

The computation of the cost of retained earning is shown below:

As we know that

Price = Dividend * (1 + growth rate) : (required rate of return - growth rate)

$25 = $2.50 * (1 + 0.05) : (required rate of return - 5%)

$25 = $2.625 : (required rate of return - 5%)

After solving the required rate of return is 15.50%

We simply applied the above formula to find out the cost of retained earning