Question

Assume that you are a consultant to Broske Inc, and you have been provided with the following data D1=$0.67, PO=$27.50, and g=8.00% (constant). What is the cost of equity from retained earnings based on the DCF approach?A. 9.42%B. 10.96%C. 10.44%D. 9.91%E. 11.51%

Answer 1

The cost of equity from retained earnings for Broske Inc, calculated using the DCF approach, is 10.44%.

Step-by-step explanation:

The cost of equity from retained earnings based on the Dividend Discount Model (DCF approach) can be calculated using the formula:

Cost of Equity

= (D1 / P0) + g

Where:

• D1 is the expected dividend next year, which is $0.67,
• P0 is the current stock price, which is $27.50, and
• g is the constant growth rate, which is 8% or 0.08.

Plugging these values into the formula gives us:

Cost of Equity

= ($0.67 / $27.50) + 0.08 = 0.02436 + 0.08 = 0.10436 or 10.436%

So the cost of equity from retained earnings for Broske Inc is:

C. 10.44%

Answer 2

C. 10.44%

Step-by-step explanation:

The formula to compute the cost of equity is shown below:

= Current year dividend ÷ price + growth rate

= D1 ÷ P0 + g

= $0.67 ÷ $27.50 + 8%

= 0.02436 + 0.08

= 10.44%

Simply we apply the DCF approach to compute the cost of equity so that the correct cost of equity could be computed

Hence, all the items would be considered for the computation part