S. 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 $34.00. 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? Do not round your intermediate calculations.

Difference = -1.45%

Explanation:

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%

you will have $2593.74 in 10 years if you set aside $1,000 at 10%

you will have $9321.91 in 20 years if you set aside $2000 at 8%

you will have $1469.32 in 5 years if you set aside $1000 at 8%

you will have $1296.87 in 10 years if you set aside $500 at 10%

you will have $239.66 in 15 years if you set aside $100 at 6%

you will have $4660.96 in 20 years if you set aside $1000 at 8%

answercountries with higher real income per capita tend to have higher levels of this index.