Question

Don't forget to write down and keep your work so you can compare your answers to the solutions 2 pts D Question 3 Builtrite's common stock is currently selling for $46 a share and the firm just paid an annual dividend of $1.90 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)? A. 13.1% B. 8.65% C. 8.91% D. 13.5%

Answer 1

Answer:

D. 13.5%

Explanation:

Price = D0 * (1 + g)/(r - g)

46 = 1.90 * (1 + 0.09)/(r - 0.09)

46 = 2.071/(r - 0.09)

r - 0.09 = 2.071/46

r - 0.09 = 0.04502173913

r = 0.04502173913 + 0.09

r = 0.1350217391

r = 13.5%

Thus, the cost of common stock is 13.5%