Underestimated Inc.\'s common shares currently sell for $35 each. The firm\'s ma
ID: 2697113 • Letter: U
Question
Underestimated Inc.'s common shares currently sell for $35 each. The firm's management believes that its shares should really sell for $41 each. The firm just paid an annual dividend of $2 per share and management expects those dividends to increase by 8 percent per year forever (and this is common knowledge to the market). The current cost of common equity for the firm is 14.17%. What does management believe is a more appropriate cost of common equity for the firm (round intermediate calculations to 4 decimal places, and final answer to 2 decimal places.) What is the cost of common equity (as per firm's belief?
Explanation / Answer
cost of common equity is say x
2 / ( x - 0.08 ) = 41
x = 0.08 + 2/ 41 = 0.1288
= 12.88%
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