CORRECT ANSWER C. THE COST OF CAPITAL FOR OFC’S RETAINED EARNIN...

137.

Correct answer c. The cost of capital for OFC’s retained earnings is equal to the required

rate of return on the company’s common stock or 15.8% as shown below.

Required rate of return = (Dividend next period ÷ Value) + Growth rate

= [($2 x 1.10) ÷ $35] + .10

= 15.8%