Question

Rivoli Inc. hired you as a consultant to help estimate its cost of capital. You have been provided with the following data: D0 = $0.80; P0 = $22.50; and g = 8.00% (constant). Based on the DCF approach, what is the cost of equity from retained earnings?

Answer 1

Cost of equity from retained earning is 11.84 %

Step-by-step explanation:

We have given dividend
`D_0=$0.80`

Price at the beginning
`P_0=$22.50`

Growth rate g = 8 %

We have to find the cost of equity from retained earning

Now dividend at the end of year
`D_1` = $0.80×1.08 = 0.864

We know that cost of equity is given by

`Ke=(D_1)/(P_O)+g=(0.864)/(22.50)+0.08=0.1184=11.84%`

So cost of equity from retained earning is 11.84 %