Discussion:
The MacBurger Company, a chain of fast-food restaurants, expects to earn $200 million after taxes for the current year. The company has a policy of paying out half of its net after-tax income to the holders of the company of the company's 100 million shares of common stock. A share of the common stock of the company currently sells for eight times current earnings. Management and outside analysts expect the growth rate of earnings and dividends for the company to be 7.5 percent per year. Calculate the cost of equity capital to this firm.
Note: Use the dividend valuation model (pp. 642-643). "A share of the common stock of the company currently sells for eight times current dividends."
Ke =D/P +g Ke -rate of return, D- dividend per share P-the present value of a share of common stock, and g-expected growth rate of dividend payments