help them estimate the company's cost of capital, Smithco has hired you as a consultant You have been provided with the following data: D1 = $1.45; P0 = $22.50; and g = 6.50% (constant) Based on the DCF approach, what is the cost of common from retained earnings?

Question

Quizplus · Accepted Answer

The cost of common from retained earnings (k) can be calculated using the constant growth dividend discount model as follows:

k = (D1/P0) + g

Where: 
D1 = next year's expected dividend
P0 = current stock price
g = expected constant growth rate

Substituting the given values, we get:

k = ($1.45/$22.50) + 6.50%
k = 12.94%

Therefore, the cost of common from retained earnings for Smithco is 12.94%. The closest answer choice is D, which is the correct answer.

Help Them Estimate the Company's Cost of Capital, Smithco Has