Consider the following information for Company XYZ:
Current Price of Stock $35.00 -
Expected dividend in 1 Year $1.20
Growth rate 7.2%
Beta 1.6 -
Risk Free Rate 4.5%
Expected Market Return 15%
Marginal Corporate Tax rate 34%
Bond Yield 12.34%
Calculate this company's cost of retained earnings using the Discounted Cash Flow (DCF) method.
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A. B. C. D. E. F.A
The DCF method for estimating the cost of retained earnings states: Cost of Retained Earnings = (Dividend for period 1 / Current Price) + Growth Rate. In this case the estimated Cost of Retained Earnings = (1.2 / 35.00) + 7.2% = 3.43 + 7.2 = 10.63%