As a consultant to Basso Inc., you have been provided with the following data: D₁ = $0.67; P₀ = $27.50; and g_L = 8.00% (constant).What is the cost of common from reinvested earnings based on the dividend growth approach? A) 9.42% B) 9.91% C) 10.44% D) 10.96% E) 11.51%

Question

Quizplus · Accepted Answer

Using the dividend growth approach: Cost of common equity = [Dividend / Current Stock Price] + Growth Rate Dividend = D₁ = $0.67 Current Stock Price = P₀ = $27.50 Growth Rate = g_L = 8.00% (constant) Cost of common equity = [0.67 / 27.50] + 0.08 Cost of common equity = 0.0244 + 0.08 Cost of common equity = 0.1044 or 10.44%

As a Consultant to Basso Inc