Firm A has just paid a cash dividend of $6.2 per share. If the growth rate is expected to be 6% and the price of the stock is $24.90, the expected return on the stock is:
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A. B. C. D.A
Po = D1/(k-g). In this case, g = 6%, D1 = Do*(1+g) = 6.2*1.06 = $6.572 and Po = $24.90. Therefore, k = 32.39%. Note that Brigham & Houston refer to k as the cost of retained earnings; this is the same as the expected rate of return demanded by shareholders, which is the same as the rate of return on common equity.