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5. Analysts of the ICM Corporation have indicated that the company is expected to grow at a 5 percent rate for as long as it is in business. Currently the ICM’s stock is selling for $70 per share. The most recent dividend paid by the company was $5.60 per share. If ICM issues new common stock it will incur flotation costs equal to 7 percent. If ICM’s marginal tax rate is 35 percent, what is its cost of retained earnings—that is, its internal equity?
a. 13.4%
b. 8.7%
c. 8.4%
d. 9.0%
e. 14.0%
Because funds provided by retained earnings are not affected by flotation costs, the cost of retained earnings is computed as follows:
Taxes are not considered here because dividends are not tax deductible.