A. This answer is incorrect. See the correct answer for a complete explanation.

B. The cost of common equity can be calculated with the following formula:

           d1  

Cre=---------------+g

           P0  

Where:

Cre = Cost of retained earnings

d1 = The next dividend to be paid

P0 = Common stock price today

g = Annual expected % growth in dividends

Note that the question says the estimated dividend at the end of the first year is $3.00 per share. Since the dividend is estimated, it is the next dividend to be paid and does not need to be adjusted upward. Inputting the information into this equation we get:

           3      

Cre=---------------+.10=.20, or 20.0%

           30       

C. This is the growth rate of the dividend. It is also the amount of the dividend divided by the stock price. However, neither of these is the cost of equity capital for this firm. See the correct answer for a complete explanation.

D. This answer is incorrect. See the correct answer for a complete explanation.