Question

Jacko Inc. hired you as a consultant to help estimate its cost of capital. You have been provided with the following data: D0 = $0.80; P0 = $57.50; and g = 8.00% (constant). Based on the DCF approach, what is the cost of equity from retained earnings? Do not round your intermediate calculations.

Answer 1

Answer:

Jacko Inc Costo fo Capitak8.15%

Explanation:

From the gordon model for stock valuation

$\frac{divends}{return-growth} = Intrinsic \: Value$

we clear and solve for cost of equity

$\frac{divends}{Price} = return-growth$

$\frac{divends}{Price} + growth = return$

$Cost of Equity =\frac{D_1}{P} +g$

D1 = D0(1+g)= 0.8 (1.08) = 0.0864

P 57.5

g 0.08

$Cost of Equity =\frac{0.0864}{57.5} +0.08$

Ke 0.081502609 = 8.15%