Question

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)?

Answer 1

0.143 or 14.3%

Step-by-step 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

`ke=(D0(1+g))/(P0)+g`

`ke=(3.20(1+0.09))/(66)+0.09`

`ke=(3.488)/(66)+0.09`

= 0.053 + 0.09

= 0.143 or 14.3%