Cost of retained earnings : Cost incurred by the company by using retained earnings, instead of declaring dividend to common stock holders. Calculate the cost of retained earnings as follows: Cost retained earnings = Expected dividend Current price + Growth rate Cost of new common stock is the cost incurred by the company for issue new common stock. Calculate the cost new common stock as follows: Cost retained earnings = Expected dividend Current price × ( 1 − Flotation cost ) + Growth rate TTH has growth rate of 4% and current price is $34 and paid a recent dividend of 4.25. Flotation cost for issuing the new common stock is 8.5%.

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Chapter 11, Problem 8PROB

Summary Introduction

Cost of retained earnings:

Cost incurred by the company by using retained earnings, instead of declaring dividend to common stock holders.

Calculate the cost of retained earnings as follows:

Cost retained earnings=Expected dividendCurrent price+Growth rate

Cost of new common stock is the cost incurred by the company for issue new common stock.

Calculate the cost new common stock as follows:

Cost retained earnings=Expected dividendCurrent price×(1−Flotation cost)+Growth rate

TTH has growth rate of 4% and current price is $34 and paid a recent dividend of 4.25. Flotation cost for issuing the new common stock is 8.5%.

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