Hammell Industries has been using 10% as its cost of retained earnings for a number of years.

Question:

Hammell Industries has been using 10% as its cost of retained earnings for a number of years. Management has decided to revisit this decision based on recent changes in financial markets. An average stock is currently earning 8%, treasury bills yield 3.5%, and shares of Hammell’s stock are selling for $29.44. The firm just paid a of $1.50, and anticipates growing at 5% for the foreseeable future. Hammell’s CFO recently asked an investment banker about issuing bonds and was told the market was demanding a 6.5% rate on similar issues. Hammell stock has a beta of 1.4. Recommend a cost of retained earnings for Hammell.

Coupon
A coupon or coupon payment is the annual interest rate paid on a bond, expressed as a percentage of the face value and paid from issue date until maturity. Coupons are usually referred to in terms of the coupon rate (the sum of coupons paid in a... Dividend
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