Question

The current Stock price is P0 = $30.00; next year's expected dividend is $2.70 (D1 = $2.70); and the dividend is expected to grow at a constant rate of 8%. What is the firm’s expected cost of retained equity (rs)? (Careful!)

Answer 1

Cost of Equity = 17%

Step-by-step explanation:

Current Stock Price = Expected Dividend/(Cost of Equity - growth rate)

30 = 2.70/(Cost of Equity - 8%)

Cost of Equity = 17%