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11 February, 19:09

Kinslow Manufacturing Company paid a dividend yesterday of $2.50 per share. The dividend is expected to grow at a constant rate of 5% per year. The price of Kinslow's common stock today is $25 per share. If Kinslow decides to issue new common stock, flotation costs will equal $2.00 per share. Keys' marginal tax rate is 34%. Based on the above information, the cost of retained earnings is;

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  1. 11 February, 19:33
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    15.50%

    Explanation:

    The computation of the cost of retained earning is shown below:

    As we know that

    Price = Dividend * (1 + growth rate) : (required rate of return - growth rate)

    $25 = $2.50 * (1 + 0.05) : (required rate of return - 5%)

    $25 = $2.625 : (required rate of return - 5%)

    After solving the required rate of return is 15.50%

    We simply applied the above formula to find out the cost of retained earning
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