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.

Junaid answered 1 year ago

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