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

Finance Oct 10, 2020

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?

Expert Solution

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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