Exxon-Mobil Corp. has a dividend payout ratio of 60 percent, expects earnings per share of $6 next year (EPS1=$6), currently has a stock price of $72, an ROE of 13%, and a growth rate of 6.2%. Exxon-Mobil stock has a beta of 0.8, as computed by a leading investment service. The present risk-free rate is 3.0 percent, and the expected return on the stock market is 11.0 percent. Based on use of the DCF approach what is Exxon-Mobil s cost of retained earnings?

11.20 %

Explanation:

Solution

Recall that,

Exxon-Mobil Corp. has a dividend payout ratio = 60%

The expected earnings per share = $6

The price of stock currently = $72

ROE = 13%

The rate of growth = 6.2%

Now,

Based on DCF Model, we have define the following

The Stock Price = Expected Dividend in Year 1 / (Cost of Retained Earnings - growth rate) =

Thus,

72 = 6*60% / (Cost of retained Earnings-6.2%)

The Retained cost of Earnings = 11.20%

Therefore, the cost of retained earnings is 11.20 %