Which of the following formulas correctly describes the cost of equity capital?

Question

Quizplus · Accepted Answer

The correct formula for the cost of equity capital is RE = D1/P0 + g, where D1 is the expected dividend, P0 is the current stock price, and g is the expected growth rate. Option A includes D0 which is the current dividend, but we need to consider expected dividends. Option B divides the expected dividend by the current stock price, which is incorrect. Option D is the formula for the capital asset pricing model (CAPM), which estimates the required rate of return rather than the cost of equity capital. Option E is a wrong formula as it is not used for the cost of equity capital.

Which of the Following Formulas Correctly Describes the Cost of Equity