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Exam CFA® Level 1 topic 1 question 2721 discussion

Actual exam question from Test Prep's CFA® Level 1
Question #: 2721
Topic #: 1
[All CFA® Level 1 Questions]

J. Ross and Sons Inc. has a target capital structure that calls for 40 percent debt, 10 percent preferred stock, and 50 percent common equity. The firm's current after-tax cost of debt is 6 percent, and it can sell as much debt as it wishes at this rate. The firm's preferred stock currently sells for $90 a share and pays a dividend of $10 per share; however, the firm will net only $80 per share from the sale of new preferred stock. Ross expects to retain $15,000 in earnings over the next year. Ross' common stock currently sells for $40 per share, but the firm will net only $34 per share from the sale of new common stock. The firm recently paid a dividend of $2 per share on its common stock, and investors expect the dividend to grow indefinitely at a constant rate of 10 percent per year. What is the firm's cost of retained earnings?

  • A. 15.5%
  • B. 12.5%
  • C. 10.0%
  • D. 18.0%
  • E. 16.5%
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Suggested Answer: A 🗳️
k(s) = $2.20/$40 + 0.10 = 15.5%.

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Catty
3 years, 10 months ago
Question, where did you get the 2.2 value?
upvoted 1 times
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