Hello everyone! I don’t understand Study Session 11, p49 of the Schweser, why in the cost of equity without flotation costs, we have this relation: re = [$1.50 ( 1+0.06) / 30] + 0.06 If I just use the constant growth model I find re = [$1.50 / 30] + 0.06 Could someone explain to me what is the (1+0.06) , and what is the formula to find it? Same question if I incorporate flotation costs. Thank you very much!
Hi there,
I don’t have the book in front of me, but it must be because $1.50 is the current dividend (so D0), so it must be multiplied by (1+g) in order to arrive at D1.
Remember, the formula is D1/P0 + g.
~Tiny
Indeed…Sorry I get mixed up between D1 and D0 and I forget the formula. Thank you very much TinyBeluga !