Question

You were recently hired by scheuer media inc. to estimate its cost of capital. you obtained the following data: d1 = 1.75; p0 =47.50; g = 7.00. What is the cost of capital for scheuer media inc.?

Answer 1

To calculate the cost of capital for Scheuer Media Inc., we use the Dividend Discount Model (DDM), specifically the Gordon Growth Model, with the provided data. By substituting the values into the formula Ke = (D1 / P0) + g, we find that the cost of equity, which is the company's cost of capital in this case, is 10.68%.

Step-by-step explanation:

The student is asking how to calculate the cost of capital for Scheuer Media Inc. using the given data: D1 (dividend next year) = $1.75, P0 (current stock price) = $47.50, and g (growth rate) = 7%. The formula for the cost of capital in this context is generally the Dividend Discount Model (DDM), which estimates the cost of equity (Ke) for a company based on the dividend it pays, its stock price, and its growth rate. The specific form of the DDM being referred to is the Gordon Growth Model, which is calculated using the formula:

Ke = (D1 / P0) + g

Applying the given numbers, we get:

Ke = ($1.75 / $47.50) + 0.07 = 0.0368 + 0.07 = 0.1068 or 10.68%

Therefore, the cost of capital, or more specifically, the cost of equity for Scheuer Media Inc., is 10.68%.