The constant growth dividend valuation model can also be used to estimate the cost of equity capital as: A) D₁/[r_s - g]. B) D₁/P_o - g. C) D₁/P_o + g. D) P_o(r_s - g). E) (D₁/P_o)(1 + r_s).

Question

Quizplus · Accepted Answer

The correct formula for estimating the cost of equity capital using the constant growth dividend valuation model is: Cost of Equity = (D1/P0) + g, where D1 is the dividend in the next period, P0 is the current price of the stock, and g is the growth rate of dividends. This matches choice C.

The Constant Growth Dividend Valuation Model Can Also Be Used