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Mathis Development Company hired you as a consultant to help them estimate its cost of capital. You have been provided with the following data: D1 = $1.45; P0 = $22.50; g = 6.50% (constant). Based on the DCF: rs = D1 /P0 + g?, what is the cost of equity from retained earnings?

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ahmedgodtrust

Answer:

ke = D1/Po + g

Ke = $1.45/$22.50 + 0.0650

Ke = 0.1294 = 12.94%

Explanation: Cost of equity is a function of dividend in 1 year's time(D1) divided by the current market price(Po) plus growth rate.

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