Question

to estimate its cost of capital. You obtained the following data: D1 = $1.75; P0 = $42.50; g = 7.00% (constant); and F = 5.00%. What is the cost of equity raised by selling new common stock? a. 13.12% b. 11.90% c. 10.77% d. 12.50% e. 11.33%

Answer 1

Answer:

11.33%

Explanation:

The dividend valuation model will be used here to calculate the cost of equity raised which can be calculated using the following formula:

r = D1 / (Po - F)           + g

Here D1, Po, F and g are given in the question so by putting the values in the equation, we have

r = $1.75 / ($42.5 - 5% of Po)      +  7%

r = 11.33%