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yuradex [85]
3 years ago
14

A company hired you as a consultant to help them estimate its cost of capital. You have been provided with the following data: D

1 = $2; P0 = $40; and g = 3% (constant). Based on the constant dividend growth model approach, what is the cost of equity?
Business
1 answer:
Kaylis [27]3 years ago
6 0

Answer:

8%

Explanation:

The formula to compute the cost of common equity under the DCF method is shown below:

= Current year dividend ÷ price + Growth rate

where,

Current year dividend is $2

Price is $40

And, the growth rate is 3%

Now put these values to the above formula  

So, the cost of equity would equal to

= $2 ÷ $40 + 3%

= 0.05+ 0.03

= 8%

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