Assume that Kish Inc. hired you as a consultant to help estimate its cost of common equity. You have obtained the following data: D0 = $0.90; P0 = $27.50; and g = 7.00% (constant). Based on the DCF approach, what is the cost of common equity?
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Answered on
The cost of common equity using the Dividend Discount Model (DCF) approach can be calculated using the formula:
Cost of Common Equity = Dividend per Share / Current Price per Share + Growth Rate
Given:
D0(Dividend per share this year) = $0.90
P0 (Current Price per share) = $27.50
g (Growth Rate) = 7.00% or 0.07
Cost of Common Equity = D0 / P0 + g
Cost of Common Equity = 0.90/27.50 + 0.07
Cost of Common Equity = 0.0327 + 0.07
Cost of Common Equity = 0.1027
So, the cost of common equity using the DCF approach is approximately 10.27%.