The Golden Baked Goods (GBG) is expecting a jump in sales and needs to add $2 million in assets. Its current balance sheet is: Its current operations are expected to add $500,000 to retained earnings during the coming year. Its current debt, originally issued at par, has a 6% coupon rate, maturity of 10 years, market price of $864.10, and pays interest semiannually. The current preferred stock (30,000 shares outstanding) carries a dividend of $6.00 per share and is selling in the market at $81.50 per share. GB's common stock (220,000 shares outstanding) is selling in the market at $45 per share. The company just paid a common stock dividend of $2.50 per share. The dividends are expected to grow at 4% per year for the foreseeable future. GBG's overall tax rate is 35%. GBG can sell new common stock at current market price with a flotation cost of 5%, new preferred stock with a dividend of $6/share to net $80 per share, and new semiannual coupon bonds (Par value $1,000) with 20 year maturity and a 9.5% coupon to net $957.10. Assume that the current market-based capital structure is optimal. What is the after-tax cost of retained earnings?

Answer rating: 100% (QA)

To find the aftertax cost of retained earnings we need to calculate the cost of equity the cost of debt and the cost of preferred stock Cost of Equity ... View the full answer