Baxter International Inc. can obtain funds for future investments through retained earnings, new issues of common...
Baxter International Inc. can obtain funds for future investments through retained earnings, new issues of common stock, and issuance of debt. Baxter's stock currently sells for $18 per share, paid a dividend of $1.20 last year (D0=$1.20), has a growth rate of 6% that is expected to continue, and new issues carry flotation costs of 7%. Baxter's bonds sell for $945, pays a 7% annual coupon, matures in 30 years, and new issues carry 3% flotation costs. Baxter's tax rate is 30%. What is Baxter's cost of retained earnings?
a. 13.60%
b. 13.07%
c. 12.67%
d. 6.06%
e. 6.76%
Homework Answers
cost of retained earnings=(D1/Current price)+Growth rate
=[(1.2*1.06)/18]+0.06
which is equal to
=13.07%(Approx).
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