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1 October, 16:14

IPI Research's common stock is currently selling for $45/share. Their most recent dividend (annual) was $2.50, and is expected to grow at 5% per year indefinitely. What is IPI's cost of retained earnings? 10.56% 10.83% 12.14% 13.00% 17.14%

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  1. 1 October, 17:18
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    The cost of retained earnings is 10.83%

    Explanation:

    The constant growth model assumes that the dividends grow at a constant rate indefinitely and the DCF approach is used to calculate the price of a stock that has constant dividend growth.

    The formula to calculate the Price of such a stock today using the constant growth model is,

    P0 = D0 * (1+g) / r - g

    We will plug in the values that are known to calculate the required rate of return on such a stock.

    45 = 2.5 * (1+0.05) / r - 0.05

    45 * (r - 0.05) = 2.625

    45r - 2.25 = 2.625

    45r = 2.625 + 2.25

    r = 4.875 / 45

    r = 0.1083 or 10.83%
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Home » Business » IPI Research's common stock is currently selling for $45/share. Their most recent dividend (annual) was $2.50, and is expected to grow at 5% per year indefinitely. What is IPI's cost of retained earnings? 10.56% 10.83% 12.14% 13.00% 17.14%
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