The corporate treasurer of Gator Electronics Corporation expects the company to grow at 4% in the future, and assumes debt securities at 6% interest (tax rate = 30%) to be a cheaper option to finance the growth.

The corporate treasurer of Gator Electronics Corporation expects the company to grow at 4% in the future, and assumes debt securities at 6% interest (tax rate = 30%) to be a cheaper option to finance the growth. The current market price per share of its common stock is $39, and the expected dividend in one year is $1.50 per share. Calculate the cost of the company's retained earnings and check if the treasurer's assumption is correct.

The risk-free rate on 10-year U.S. Treasury bills is 3% and the expected rate of return on the overall stock market is 11%. If Gator Electrics has a beta of 1.6. What is the cost of equity?

TUTORIAL PREVIEW

Cost of retained earnings = (D1/ P0) + g

D1 =	1.5
P0 =	39
g =	4%

File name: Gator-Electronics-2ques.xls File type: XLS Price: $6