Bouchard and Company hired you as a consultant to help estimate its cost of capi

Question

Bouchard and Company hired you as a consultant to help estimate its cost of capital. 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 $47.00. Based on the DCF approach, by how much would the cost of equity from retained earnings change if the stock price changes as the CEO expects?

Question 21 options:

–2.18%

–1.85%

–2.37%

–2.00%

–2.64%

–2.18%

–1.85%

–2.37%

–2.00%

–2.64%

Explanation / Answer

Cost of Equity = Do/Po + G

When the stock price is $ 22

= 0.85/22+6%

= 0.038 + 0.06

= 0.098 = 9.8%

When it moves up to $ 47

0.85/47+6%

= 0.018+0.06

= 0.078 or 7.8%

% change in Cost of Equity = 7.8% - 9.8% = - 2%

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