Slater Enterprises is interested in determining the cost of its common stock. Du

Question

Slater Enterprises is interested in determining the cost of its common stock. During the next year, the company expects to pay dividends of $3.00 per share and the current price of its stock is $75. The expected growth rate is 3%.  Flotation costs are 4% of the price. Compute the cost of retained earnings and the cost of new common stock.

Select one:

a. The cost of retained earnings is 4.2% and the cost of new common stock is 4.5%.

b. The cost of retained earnings is 7.2% and the cost of new common stock is 7.5%.

c. The cost of retained earnings is 6.5% and the cost of new common stock is 6.9%.

d. The cost of retained earnings is 7% and the cost of new common stock is 7.17%.

Explanation / Answer

Re = (D / P ) + g

Re = (3 / 75 ) + 3% = 7% (Retained earnings)

Rnew = (D / P*(1-f) ) + g

Re = (3 / (75*(1-4%)) ) + 3% = 7.17%

Option D

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