Cost of Retained Earnings for Amy Jolly's Company
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Amy Jolly is the treasurer of her company. She expects the company will grow at 4% in the future, and debt securities (YTM=14%, tax rate= 30%) will always be a cheaper option to finance the growth. The current market price per share of its common stock is $39, and the expected dividend in one year is $1.50 per share. Calculate the cost of the company's retained earnings and check if Amy's assumption is correct.
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Solution Summary
The solution explains how to calculate the cost of retained earnings for Amy Jolly's company.
Solution Preview
Using the constant growth formula
Cost of retained earnings = D1/P0 + g
where
D1 = expected dividend = ...
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