The cost of retained earnings for Tangshan Mining would be 16.64 percent if the firm just paid a dividend of $4.00, the stock price is $50.00, dividends are expected to grow at 8 percent indefinitely, and flotation costs are $5.00 per share.

Question

Quizplus · Accepted Answer

The cost of retained earnings is the rate of return that shareholders require on their investment in the company. It is calculated as the dividend yield plus the expected growth rate of dividends. In this case, the dividend yield is 4.00 / 50.00 = 8.00%. The expected growth rate of dividends is 8.00%. Therefore, the cost of retained earnings is 8.00% + 8.00% = 16.00%.

The Cost of Retained Earnings for Tangshan Mining Would Be