As a new Investment Analyst for Melton and Morgan Capital Management, Inc., you are asked to estimate the cost of FDX equity capital (retained earnings) using the discounted cash flow model:

r_fdx = D₁ /P₀ + g

The following information is obtained from: http://finance.yahoo.com/q?s=FDX&ql=0

The stock price today is $273.45 and it is expected to pay a dividend of $2.60 a share at the end of the year (D₁ = $2.60). Current EPS for FDX is $6.79, since dividends (D₁) are expected to be $2.60, the dividend payout ratio (p) is $2.60/$6.79 = 38.29%. Assume a payout ratio (p) of 0.3829 (38.29%) for the foreseeable future, and that FDX will invest retained earnings to yield 12%, the estimate that the future growth rate for FDX is g = (1-0.3829)*12% = 7.41% (g=7.41%). What is the cost of retained earnings estimated, at this time, for FDX using the DCF approach?

r_FDX = D₁/P₀ + g =