You are a new employee of the Scannell Poultry Processing Company and as a part of your training, you are asked to determine the cost of equity capital (retained earnings) for the firm. You observe that the latest (2020) dividend per share is (D0 = 4.70), the stock price is $100, and the annual earnings per share have been:

EPS

2015$7.84

2016 8.32

2017 8.83

2018 9.37

2019 9.94

202010.55

Also, you observe that the current 10-year U.S. treasury rate is 0.83 percent and according to Pablo Fernandez, et.al., the average US stock market risk premium (stock market return less yield on 10-year US Treasuries) used by investors is 5.5 percent. The beta for Scannell is 1.869.Also, use the annual compound growth rate for EPS for the 5-year period from 2015-2020 to estimate the firms grow rate.

A. What is your estimate for the cost of retained earnings? Use both the DCF and the CAPM models in your estimates.

B. What is your estimate for the cost of retained earnings? Use both the DCF and the CAPM models in your estimates.

DCF Model

rs = D1/P0 + g

rs =

CAPM Model

rs = rrf + [5.5%]

CAPM: rs =

C. Given a transaction (flotation) costs of 5% for newly issued common stock, what is the percentage cost of new-issue common stock for Scannell?

DCF: rne =

D. Explain why retained earnings has a cost?