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3 January, 15:46

Exxon-Mobil Corp. has a dividend payout ratio of 60 percent, expects earnings per share of $6 next year (EPS1=$6), currently has a stock price of $72, an ROE of 13%, and a growth rate of 6.2%. Exxon-Mobil stock has a beta of 0.8, as computed by a leading investment service. The present risk-free rate is 3.0 percent, and the expected return on the stock market is 11.0 percent. Based on use of the DCF approach what is Exxon-Mobil s cost of retained earnings?

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  1. 3 January, 19:11
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    11.20 %

    Explanation:

    Solution

    Recall that,

    Exxon-Mobil Corp. has a dividend payout ratio = 60%

    The expected earnings per share = $6

    The price of stock currently = $72

    ROE = 13%

    The rate of growth = 6.2%

    Now,

    Based on DCF Model, we have define the following

    The Stock Price = Expected Dividend in Year 1 / (Cost of Retained Earnings - growth rate) =

    Thus,

    72 = 6*60% / (Cost of retained Earnings-6.2%)

    The Retained cost of Earnings = 11.20%

    Therefore, the cost of retained earnings is 11.20 %
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