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Rivoli Inc. hired you as a consultant to help estimate its cost of capital. You have been provided with the following data: D0 = $0.80; P0 = $22.50; and g = 8.00% (constant). Based on the DCF approach, what is the cost of equity from retained earnings?

Respuesta :

Answer:

Cost of equity from retained earning is 11.84 %

Explanation:

We have given dividend [tex]D_0=$0.80[/tex]

Price at the beginning [tex]P_0=$22.50[/tex]

Growth rate g = 8 %

We have to find the cost of equity from retained earning

Now dividend at the end of year [tex]D_1[/tex] = $0.80×1.08 = 0.864

We know that cost of equity is given by

[tex]Ke=\frac{D_1}{P_O}+g=\frac{0.864}{22.50}+0.08=0.1184=11.84%[/tex]

So cost of equity from retained earning is 11.84 %

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