Rivoli Inc. hired you as a consultant to help estimate its cost of common equity. You have been provided with the following data: D0 = $0.80; P0 = $22.50; and g = 8.00% (constant). Based on the DCF approach, what is the cost of common from retained earnings?

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Quizplus · Accepted Answer

The cost of common equity using the Dividend Discount Model (DCF approach) is calculated as: Cost of Equity = (D1 / P0) + g, where D1 = D0 * (1 + g). Here, D1 = $0.80 * (1 + 0.08) = $0.864. Therefore, Cost of Equity = ($0.864 / $22.50) + 0.08 = 0.0384 + 0.08 = 0.1184 or 11.84%.