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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?a. 11.10%b. 11.68%c. 12.30%d. 12.94%e. 13.59%

Respuesta :

Answer:

Option (D) is correct.

Explanation:

Cost of common stock:

= (Expected dividend at the end of Year 1 ÷ Price of stock) + Growth rate.

= (1.45 ÷ 22.50) + 0.065

= 0.0644 + 0.065

= 0.1294 i.e., 12.94%

Conclusion:-

Cost of common stock = 12.94%

Note:-

D1 = Expected dividend at the end of Year 1,

P0 = Current price of common stock, and

gL = Growth level i.e., growth rate in dividend.

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