A firm’s cost of equity capital is 20%, the average tax rate is 40% and 3% brokerage is expected by the…
The cost of retained earnings is 11.64%. Adjusting the equity return for shareholders’ tax and reinvestment brokerage gives 20% × (1 − 0.40) × (1 − 0.03) = 20% × 0.60 × 0.97…
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A firm’s cost of equity capital is 20%, the average tax rate is 40% and 3% brokerage is expected by the shareholders. What is the cost of retained earnings?
Answer and explanation
Correct answer B
The cost of retained earnings is 11.64%. Adjusting the equity return for shareholders’ tax and reinvestment brokerage gives 20% × (1 − 0.40) × (1 − 0.03) = 20% × 0.60 × 0.97 = 11.64%.
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Kerala SET (LBS Centre)