Question

Assume that Kish Inc. hired you as a consultant to help estimate its cost of common equity. You have obtained the following data: D0 = $0.90; P0 = $27.50; and g = 7.00% (constant). Based on the DCF approach, what is the cost of common from retained earnings?

Answer 1

10.5%

Step-by-step explanation:

the complete formula for calculating the intrinsic value of a stock with a growing perpetuity is:

stock price₀ = dividend₁ / (cost of equity - growth rate)

stock price₀ = $27.50

dividend₁ = dividend₀ x (1 + growth rate) = $0.90 x 1.07 = $0.963

growth rate = 7%

$27.50 = $0.963 / (cost of equity - 7%)

cost of equity - 7% = $0.963 / $27.50

cost of equity - 7% = 3.5%

cost of equity = 10.5%