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Assume that Kish Inc. hired you as a consultant to help estimate its cost of capital. You have obtained the following data: D0 = $1.00; P0 = $25.00; and g = 7.00% (constant).
Assume that Kish Inc. hired you as a consultant to help estimate its cost of capital. You have obtained the following data: D0 = $1.00; P0 = $25.00; and g = 7.00% (constant). Based on the DCF approach, what is the cost of equity from retained earnings? Do not round your intermediate calculations.
Solutions
Expert Solution
We have , P0 = D1/(r-g)
P0 = 25
g= 7%
D1 = D0*(1+g)
=> D1 = 1*1.07
= 1.07
=> 25 = 1.07/(r-0.07)
=> r = (1.07/25) +0.07
=> r = 11.28%
So 11.28% is the cost of equity from retained earnings.
So 11.28% is the cost of equity from retained earnings.
So 11.28% is the cost of equity from retained earnings.
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