Chambliss Inc.hired you as a consultant to help estimate its cost of capital.You have been provided with the following data: D₀ = $0.90; P₀ = $27.50; and g = 8.00% (constant).Based on the DCF approach,what is the cost of equity from retained earnings?

Question

Quizplus · Accepted Answer

We can use the dividend growth model to estimate the cost of equity from retained earnings. 
Cost of Equity (ks) = (DS1 / PS1) + g
Where:
DS1 = expected dividends per share next year
PS1 = current market price per share
g = expected constant growth rate of dividends
DS1 = DS0 * (1 + g) = $0.90 * (1 + 0.08) = $0.972
ks = ($0.972 / $27.50) + 0.08 = 0.1173 or 11.73%
Therefore, the closest answer choice to 11.73% is C) 11.53%.