Assume that you are a consultant to Morton Inc., and you have been provided with the following data: D1 = $1.00; P0 = $25.00; and g = 6% (constant). What is the cost of equity from retained earnings based on the DCF approach?
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This is what I got so far and it looks wrong 6.04
r = D1 + g
P0
To calculate the cost of equity from retained earnings using the Discounted Cash Flow (DCF) approach, we can use the Dividend Discount Model (DDM). The DDM calculates the present value of all future expected dividends.
The formula to calculate the cost of equity from retained earnings using the DDM is as follows:
Cost of Equity (Ke) = (Dividend per Share (D1) / Price per Share (P0)) + Growth Rate (g)
Given the provided data:
D1 = $1.00
P0 = $25.00
g = 6% (0.06)
Let's plug the values into the formula:
Ke = (1.00 / 25.00) + 0.06
Ke = 0.04 + 0.06
Ke = 0.10 or 10%
Therefore, the cost of equity from retained earnings based on the DCF approach is 10%.