Maxwell and Associates recently hired you to help estimate i

Maxwell and Associates recently hired you to help estimate its cost of common equity. You have obtained the following data: D0 = $0.90; P0 = $27.50; flotation cost =4%; and g = 7.00% (constant). Based on the DCF approach, what is the cost of common from retained earnings?

Solution

cost of common from retained earnings = [D0(1+g)/p(1-F)] + g

          = [.90(1+.07 )/27.5 (1-.04)] +.07

         = [.90 *1.07 /27.5*.96]+.07

          =[.90*1.07 / 26.4]+.07

          = .0365+.07

          = .1065 or 10.65%