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As the assistant to the CFO of Johnstone Inc., you must estimate its cost of common equity. You have been provided with the following data: D0 = $0.80; P0 = $22.50; and gL = 8.00% (constant). Based on the dividend growth model, what is the cost of common from reinvested earnings?a. 10.69%b. 11.25%c. 11.84%d. 12.43%e. 13.05%

Respuesta :

TomShelby

Answer:

c. 11.84%

Explanation:

We start fro mthe dividend gros model formula:

[tex]\frac{divends_1}{return-growth} = Intrinsic \: Value[/tex]

We must notice we need next year dividend to calculatethe value of the stock today so we calculate this first:

D1 = D0 x (1+g) = 0.8 x (1+.08) = 0.864

Now we plug the values into the formula and solve for return:

[tex]\frac{0.864}{return-0.08} = 22.50[/tex]

[tex]\frac{0.864}{22.50} +0.08= return[/tex]

return = 0.1184 = 11.84%

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