Question

ssume that Kish Inc. hired you as a consultant to help estimate its cost of capital. You have obtained the following data: D 0 = $0.90; P 0 = $27.50; and g = 7.00% (constant). Based on the DCF approach, what is the cost of equity from retained earnings? 9.29% 9.68% 10.08% 10.50% 10.92%

Answer 1

Answer:

Option (D) is correct.

Explanation:

Given that,

Dividend, D0 = $0.90

Price, P0 = $27.50

Growth rate, g = 7.00% (constant)

D1 = D0 (1 + g)

    = $0.90 × (1 + 0.07)

    = $0.90 × 1.07

    = $0.963

Cost of equity, Ke = [ D1 ÷ P0 ] + g

                               = [$0.963 ÷ $27.50 ] + 0.07

                              = 0.0350 + 0.07

                               = 0.1050 i.e 10.50 %