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The Discounted Cash Flow model (referred to as the Direct Dividend Model in the MBA 620 course materials) is preferred b...

The Discounted Cash Flow model (referred to as the Direct Dividend Model in the MBA 620 course materials) is preferred by wealthy investors. The formula reduces to rs = (D1 / P0 ) + g where rs is the required return on equity or the Cost of Equity, D1 is the expected future dividend, P0 is the rice of the stock today and g is the expected growth in dividends. The CFO notes that the expected future dividend is $2.38 and the expected growth rate is 7%. Please use $135 per share as the stock price.   Calculate the cost of equity rs using the DCF approach.

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Answer #1

Hre,

Dividend in Year 1, D1 = $2.38

Growth Rate, g = 7%

Stock Price, P0 = $135

So,

Using DCF Model,

Cost of Equity = (2.38/135) + 0.07

Cost of Equity = 0.0876

Cost of Equity = 8.76%

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