Question

Angell Inc. hired you as a consultant to help them estimate their cost of capital. You have been provided with the following data: D0 =$1.20; P0 = $50.00; and g = 6% (constant). Based on the DCF approach, what is the cost of equity from retained earnings?
A. 8.07%



B. 8.26%



C. 8.41%



D. 8.54%



E. 8.70%

Answer 1

Answer:

Option (D) is correct.

Explanation:

Given that,

Dividend, D0 =$1.20

Price, P0 = $50.00

Growth rate, g = 6% (constant)

Based on the DCF approach, then

Cost of Equity:

= [D0 × (1 + g) ÷ P0] + g

= [(1.20 × (1 + 0.06)) ÷ 50] + 0.06

= (1.272 ÷ 50) + 0.06

= 0.02544 + 0.06

= 0.08544 or 8.54%

Hence, the cost of equity from retained earnings is 8.54%.