Final answer:
The cost of capital for Kish Inc. can be calculated using the formula for the cost of equity, resulting in an estimated cost of capital of 12.5%.
Step-by-step explanation:
The student has asked how to estimate the cost of capital for Kish Inc. using the dividend discount model. The information provided includes the current dividend (d0) of $0.90, the current stock price (p0) of $17.50, and a constant growth rate (g) of 7%. The cost of capital, in this case, can be estimated using the formula for the cost of equity capital:
Cost of Equity (ke) = (d0 × (1 + g)) / p0 + g
This formula takes into account the dividend to be paid next year (which is the current dividend grown by the growth rate), the current stock price, and the growth rate of dividends. Plugging in the values provided:
ke = ($0.90 × (1 + 0.07)) / $17.50 + 0.07
ke = ($0.90 × 1.07) / $17.50 + 0.07
ke = $0.963 / $17.50 + 0.07
ke = 0.055 + 0.07
ke = 0.125 or 12.5%
Therefore, the estimated cost of capital for Kish Inc. is 12.5%.