[PaTrOn007]

Hi Ninjas,

Please someone help me with the DCF method calculation of cost of equity…

Question:

Using the DCF method, estimate the cost of equity capital for a firm with a stock price of $30.00, and estimated dividend at the end of the first year of $3.00 per share, and an expected growth rate of 10%.

a. 21.1%
b. 20.0%
c. 11.0%
d. 12.2%
————-

The formula is: [Current Dividend X (1+g)] + g

and using the formula above I get 21%, which is close to 21.1%; but when I pick this answer, it says that the answer is 20%.

explanation says:

3$/30 + 10% growth rate = 20%;

How come they do not multiply the current dividend in the beginning?

Thank you:)

[as]

That is because in the question the Dividend which is given is already for next year “Estimated Dividend”, so u dont need to add 10%, and the formula which u wrote is for “Current Dividend”. Hope u now ur doubt is clear.

[PaTrOn007]

Aesha – THANK YOU!!!

[Author]

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