Question

Assume that you are a consultant to Broske Inc., and you have been provided with the following data: D1 = $0.67; P0 = $45.00; and g = 8.00% (constant). What is the cost of equity from retained earnings based on the DCF approach?

Answer 1

Answer:

9.48%

Explanation:

Data provided:

D₁ = $ 0.67

P₀ = $ 45.00

growth rate, g = 8%

Now,

the cost of the equity is given as:

Cost of the equity = (D₁ / P₀) + g

thus, on substituting the respective values, we get

Cost of the equity = (0.67 / 45) + 0.08

or

Cost of the equity = 0.0148 + 0.08

or

Cost of the equity = 0.0948

or

Cost of the equity = 0.0948 × 100% = 9.48%