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Homework answers / question archive / To help estimate its cost of common equity, Maxwell and Associates recently hired you

To help estimate its cost of common equity, Maxwell and Associates recently hired you

Finance

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?

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Computation of the cost of common equity:-

Cost of common equity = (D1 / P0) + Growth rate

= ($0.90 * (1 + 7.00%) / $27.50) + 7.00%

= ($0.963 / $27.50) + 7.00%

= 3.50% + 7.00%

= 10.50%

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