Answer: 14%
Explanation:
We can calculate this using the Gordon Growth Model which looks like this,
P = D1 / r - g
P is the current stock price
D1 is the next dividend
r is the rate of return or the cost of capital
g is the growth rate.
We have all those figures except the cost of capital so making r the subject of the formula we can solve for it. Doing that will make the formula,
r = D/ P + g
r = 1.55 / 22.10 + 0.07
r = 0.1401
r = 14%
14% is the equity cost of capital.
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<u>Solution and Explanation:</u>
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Answer
Retained earnings at the beginning of Year 2 was: $1,450
Explanation
Revenue = $2,100
Retained Earnings Closing Balance = $1,850
Expenses = $1,150
Dividends = $550
Retained Earnings Closing Balance = Revenue - Expenses - Dividends + Retained Earning Beginning Balance
$1,850 = $2,100 - $1,150 - $550 + Retained Earning Beginning Balance
Retained Earning Beginning Balance = $1,450
