CFA Practice Question

CFA Practice Question

An analyst gathered the following information about a manufacturing company:
Expected cash dividends (per share) one year from today: $6.00
Expected growth rate: 7%.
Common stock (current market price per share): $72.00.
Company tax rate: 34%.

The company's after-tax cost of retained earnings is closest to:
A. 15.33%.
B. 10.12%.
C. 14.79%.
Explanation: No tax adjustment is made because dividends paid on common stock are not tax deductible: ($6.00/$72.00) + 7% = 15.33%.

User Contributed Comments 2

User Comment
Mariana80 Why does this mix next year's dividend with the current year's price?
Procbaby1 r=(D1/P0)+g
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