The corporate treasurer of Gonic Manufacturing Company expects the company to gr

Question

The corporate treasurer of Gonic Manufacturing Company expects the company to grow at 4% in the future. She notes that debt will have an interest rate of 4% interest and the corporate tax rate is 35%. She believes that debt will be a cheaper option to finance the growth. The current market price per share of its common stock is $19, and the expected dividend in one year is $0.75 per share. Calculate the cost of the company's retained earnings and check if the treasurer's assumption is correct. Answer_Cost of debt after tax is 2.60% Cost of retained earnings is 7.95% Please explain in excel

Explanation / Answer

Growth rate 4% Debt 4% tax 35% after tax cost of debt 2.60% Cost of Equity= (Dividend per share/MP per share)+Growth rate =(0.75/19)+4% 7.95% debt will be a cheaper option to finance the growth

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