Question

Teall Development Company hired you as a consultant to help them estimate its cost of capital. You have been provided with the following data: D1 = $1.45; P0 = $19.00; and g = 6.50% (constant). Based on the DCF approach, what is the cost of equity from retained earnings?

Answer 1

Answer:

14.13%

Explanation:

DCF formula for finding the cost of equity from retained earnings is as follows;

r = $\frac{D1}{P0} +g$

D1 = next year's dividend= $1.45

P0= Current stock price  = $19

g = growth rate of the dividends which is constant in this case indefinitely= 6.50%

Plug in the numbers to the above DCF formula to find r;

r = $\frac{1.45}{19} + 0.065\\ \\ =0.07632+0.065\\ \\ =0.1413$

Therefore, as a percentage, the cost of equity from retained earnings is 14.13%