XYZ currently has common stock trading at $40 per share. XYZ just paid a dividend of $2.00 per share, which is expected to grow at a constant rate of 5%. XYZ's beta is 1.5, the risk-free rate is 2%, and the market return is expected to be 8%. The pre-tax yield on XYZ's bonds is 7%. XYZ's finance department believes that new stock would require a premium of 5% over their own bond yield. Flotation cost for issuing new stock is 10%. Compute the cost of retained earnings using the discounted cash flow method (show your answer in percent, and to 2 decimal places. Example: 9.62%).

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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XYZ currently has common stock trading at $40 per share.  XYZ just paid a dividend of $2.00 per share, which is expected to grow at a constant rate of 5%.  XYZ's beta is 1.5, the risk-free rate is 2%, and the market return is expected to be 8%.  The pre-tax yield on XYZ's bonds is 7%.  XYZ's finance department believes that new stock would require a premium of 5% over their own bond yield.  Flotation cost for issuing new stock is 10%.

Compute the cost of retained earnings using the discounted cash flow method (show your answer in percent, and to 2 decimal places. Example: 9.62%).

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