Determine the firm''s cost of retained earnings

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Reference no: EM1310262

The Dempere Imports Company's EPS in 2009 was $2.82, and in 2004 it was $1.65. The company's payout ratio is 30%, and the stock is currently valued at $41.50. Flotation costs for new equity will be 15%. Net income in 2010 is expected to be $15 million. The market-value weights of the firm's debt and equity are 40% and 60%, respectively.

a)Based on the five-year track record, what is Dempere's EPS growth rate? What will the dividend be in 2010?

b)Calculate the firm's cost of retained earnings and the cost of new common equity.

c)If Dempere's after-tax cost of debt is 8%, what is the WACC with retained earnings? With new common equity?

Hint: Cost of RE is 13.58%. Remember this is just one component of WACC.

Reference no: EM1310262

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