Question

S. Bouchard and Company hired you as a consultant to help estimate its cost of common equity. You have obtained the following data: D0 = $0.85; P0 = $22.00; and g = 6.00% (constant). The CEO thinks, however, that the stock price is temporarily depressed, and that it will soon rise to $34.00. Based on the DCF approach, by how much would the cost of common from retained earnings change if the stock price changes as the CEO expects?

Answer 1

Answer:

-1.45%

Explanation:

The computation of cost of common from retained earnings change is shown below:-

                             Old Price     New Price

$D_{o}$                           $0.85          $0.85

$P_{o}$                            $22.00       $34.00

g                              6.00%         6.00%

$D_{1}= D_{o}\times \ ( 1 + g )$  $0.901         $0.901

$R_{e}$ $=\frac{D_{1} }{P_{o} } + G$            10.10%          8.65%

Difference = New Price - Old Price

= 8.65% - 10.10%

= -1.45%

Therefore for computing the of cost of common from retained earnings change we simply deduct the old price from new price.

Answer 2

The accumulated net earnings of a firm after dividend payments are known as retained earnings. This profit is frequently distributed to shareholders, but it can also be reinvested in the business to help it develop.

Difference = -1.45%

As per the data given in the question,

                               Old price          New price

D0                              $0.85              $0.85

P0                               $22.00            $34.00

g                                   6.00%              6.00%  

D1 = D0 × (1+g)             $0.901             $0.901  

rs = D1 ÷P0 + g             10.10%            8.65%

We can calculate the difference by using following formula:

Difference = rs (old price) - rs1 (New price)

By putting the value, we get

= 8.65% - 10.10%

= -1.45%

To know more about cost of common equity, refer to the link:

https://brainly.com/question/16341423