Assume that Kish Inc. hired you as a consultant to help estimate its cost of capital. You have obtained the following data: D0 = $0.90; P0 = $27.50; and g = 7.00% (constant). Based on the DCF approach, what is the cost of equity from retained earnings?

Question

Quizplus · Accepted Answer

Using the constant growth dividend discount model: 
Ke = (D1/P0) + g 
D1 = D0 * (1+g) = 0.90*(1+0.07) = 0.963 
Ke = (0.963/27.50) + 0.07 = 0.035 + 0.07 = 0.1050 or 10.50%

Assume That Kish Inc