To 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 gL = 6.50% (constant). Based on the dividend growth approach, what is the cost of common from reinvested earnings?

Question

Quizplus · Accepted Answer

$\begin{array}{lr}
\mathrm{D}_{1} & \$ 1.45 \
\mathrm{P}_{0} & \$ 22.50 \
\mathrm{~g} & 6.50 \% \
\mathrm{I}_{\mathrm{s}}=\mathrm{D}_{1} / \mathrm{P}_{0}+\mathrm{g} & 12.94 \%
\end{array}$

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