Question

Teall development company hired you as a consultant to help them estimate its cost of capital. you have been provided with the following data: d1=2.30, po=32, and g=6.50%. based on the dcf approach, what is the cost of equity from retained earnings?

Answer 1

The cost of equity from retained earnings can be calculated using the Dividend Discount Model (DDM) approach. In this case, the cost of equity from retained earnings is approximately 13.69%.

Step-by-step explanation:

The cost of equity from retained earnings can be calculated using the Dividend Discount Model (DDM) approach, which considers the future dividends received by shareholders.

The formula to calculate the cost of equity from retained earnings is: Cost of Equity = (Next Dividend / Current Stock Price) + Growth Rate. In this case, the Next Dividend (D1) is given as $2.30, the Current Stock Price (Po) is given as $32, and the Growth Rate (g) is given as 6.50%.

Cost of Equity = (2.30 / 32) + 0.065 = 0.071875 + 0.065 = 0.136875 or 13.69%.

Therefore, the cost of equity from retained earnings is approximately 13.69%.