the assistant to the CFO of Johnstone Inc., you must 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?

Question

Quizplus · Accepted Answer

The cost of common equity from retained earnings can be calculated as follows:

Cost of common equity from retained earnings = (D1/P0) + g
where:
D1 = D0 × (1 + g) = $0.80 × (1 + 0.08) = $0.864
P0 = $22.50
g = 8.00%

Plugging in the values, we get:

Cost of common equity from retained earnings = ($0.864/$22.50) + 0.08 = 0.038 + 0.08 = 0.1184 = 11.84%

Therefore, the best choice is C.

The Assistant to the CFO of Johnstone Inc