To help estimate its cost of common equity, Maxwell and Associates recently hired you. You have obtained the following data: D0 = $0.90; P0 = $27.50; and gL = 7.00% (constant). Based on the dividend growth model, what is the cost of common from reinvested earnings?a. 9.29%b. 9.68%c. 10.08%d. 10.50%

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valetta valetta · Answer 1 · 2019-11-05T08:04:03+01:00

Answer:

option (d) 10.50%

Explanation:

Data provided :

D0 = $0.90

P0 = $27.50

gL = 7.00%

Now,

D1 = D0 × ( 1 + gL )

or

⇒ D1 = $0.90 × ( 1 + 7% )

or

⇒ D1 = $0.90 × ( 1 + 0.07 )

or

⇒ D1 = $0.963

Therefore,

The cost of common from reinvested earnings = [tex]\frac{D1}{P0}+g[/tex]

or

⇒ The cost of common from reinvested earnings = [tex]\frac{0.963}{27.50}+7\%[/tex]

or

⇒ The cost of common from reinvested earnings = 0.0350 + 0.07

or

⇒ The cost of common from reinvested earnings = 0.1050

or

⇒ The cost of common from reinvested earnings = 0.1050 × 100% = 10.50%

Hence,

The correct answer is option (d) 10.50%