Question

Tangerine Inc.'s target capital structure is 20 percent debt, 20 percent preferred stock, and 60 percent common equity. Its bonds have a 12 percent coupon rate, semiannual interest payments, a current maturity of 20 years, and a market value equal to their par value of $1,000. The firm's marginal tax rate is 40 percent. The firm's policy is to use a risk premium of 4 percentage points when using the bond-yield-plus-risk-premium method to determine its cost of retained earnings. What is Tangerine's component cost of retained earnings

Answer 1

Answer:

16.00%

Step-by-step explanation:

Cost of retained earnings

= Expected dividend / Current price + Growth rate

Here,

Expected dividend = Current dividend x (1 + Growth rate) = 2.00 x 1.08 = $2.16

Current price = $27.00

Growth rate = 8% = 0.08

So,

Cost

= 2.16 / 27.00 + 0.08

= 16.00%