Question 1 of Moving to another question will save this resp

Question 1 of Moving to another question will save this response. Question 1 20 points Save A The cEo of Barding Media Inc. as asked you to help estimate its cost of common equity. You have obtained the following data: Do-$0.85 Po -$22.00: payout zatio is 60: and ROE -5. The CEO thinks, however, that the stock price is temporarily depzessed, and that it will soon rise to $25.00 Based on the DCE approach, by how much would the cost of common from retained earnings change if the stock price changes as the CEO expects? T TTF Paragraph: Anal : 3(12pn : Words 0 Question t of5 0

Solution

payout ratio =60%, so retention ratio =40% and ROE =5%

so growth rate = retention ratio x ROE = 40% x 5% = 2% (g)

now P0 = 22, D0 =0.85, g =2%

D1 = D0(1+g) = 0.85(1 +0.02) = 0.867

so ke = D1/P0 + g = 0.867/22 + 0.02 = 0.0594 = 5.94%

Now if price changes to 25 as CEO expects

ke = D1/P0 + g = 0.867/25 + 0.02 = 0.0594 = 5.47%

so change in cost of common from retained earnings = 5.47% - 5.94% = -0.47% answer

ANSWER = -0.47%

so ke =