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Assume that you are a consultant to Broske Inc., and you have been provided with the...

Assume that you are a consultant to Broske Inc., and you have been provided with the following data: D1 = P0.67; P0 = P27.50; and g = 8.00% (constant). What is the cost of equity from retained earnings based on the DCF approach?

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Answer #1

The rate of return expected on the investment made in common stock is termed at the cost of equity (Ke). The dividend valuation model is often used in determining the Ke.

In the given question, D1 = P0.67 is the dividend at the end of year 1.

P0 = P27.50 is the price of the stock.

g = 8% is the future growth in the dividend.

Compute the cost of equity (Ke) by dividing the D1 of 0.67 with P0 which is 27.50. Add the resulting figure to g which is 0.08.

where,

Ke = the cost of equity

D1 = the dividend to be paid at the end of year 1

P0 = the price of a stock

g = the growth of dividend in the future

The cost of equity from retained earnings based on the DCF approach is

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