Assume that Burger Queen Inc. hired you as a consultant to help estimate its cost of capital. You have obtained the following data: D0 = $0.80; P0 = $26.00; and g = 6.00% (constant). Based on the DCF approach, what is the cost of equity from retained earnings? 9.26% 9.14% 8.87% 8.54% 8.48%

The cost of equity capital is 9.26%

Explanation:

Using the DCF approach we usually calculate the price of stock or fair value of stock at a certain period in time based on the dividends the company is expected to pay. If the price today is provided then we can calculate the missing figure if any when other variables are provided.

The formula for DCF with constant growth model is,

P0 = D0*(1+g) / r - g

Where r is the required rate of return.

26 = 0.8*(1+0.06) / r - 0.06

26 * (r-0.06) = 0.848

26r - 1.56 = 0.848

26r = 0.848 + 1.56

r = 2.408 / 26

r = 0.0926 or 9.26%

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