I have the answer for a problem below. I understand how to calculate CAPM and Risk Premium, but not how to calculate the Discounted Cash Flow (DCF) method.

Problem:
Acme Corporation's next expected dividend (D1) is $2.50. The firm has maintained a constant payment ratio of 50 percent during the past 7 years. Seven years ago its EPS was $1.50. The firm's beta coefficient is 1.2. The required rate of return on an average stock in the market is 13 percent, and the risk-free rate is 7 percent. Acme's A-rated bonds are yielding 10 percent, and its current stock price is $30. Which of the following values is the most reasonable estimate of Acme's cost of common equity, rs?

DCF: Cost of common equity (rs)= expected dividend (D1) / stock price is $30 = growth (g), where g can be estimated as follows:
$0.75 = $2.50 (PVIF r,7)
PVIF r,7 = $0.75 / $2.5 = 0.3000

The books states, "Thus r, which is the compound growth rate, g is about 19%, or using a calculator, 18.8%. Therefore, rs = 0.083 + 0.1888 = 27.1%."

My question: How do you calculate 19%, or using a calculator, 18.8%?

Thank you.

Solution Preview

My question: How do you calculate 19%, or using a calculator, 18.8%?

What the value of 19% or 18.8% is the compound rate of growth. The initial value of EPS is 1.50 and dividend is 50% of EPS. So the dividend seven years ago was 0.75. The dividend ...

Solution Summary

The solution explains how to calculate the cost of equity

Earnings Smoothness, Average Returns, and Implied Cost of Equity. See the attachments. ... Earnings Smoothness, Average Returns, and Implied Cost of Equity Capital. ...

... tax cost of debt is the yield the company is to pay times (1 - T). - For equity: Use the beta of Time Warner and the computation of the cost of equity from the ...

Multiple Choice Questions in finance: cost of capital, cost of debt, cost of equity, capital structure weights, WACC, debt-equity ratio, preferred stock, rate ...

... $6,000=166.67% Price of stock increased to $130: Investor is behind by an amount= ($130-$100)*100=$3,000 Hence, Assets Liabilities and Equity Sale Proceeds ...

... 0.929 -0.580 -0.673 -0.707 0.273 0.304 Total Debt/Inve Total Total Quarterly sted Debt/Tot Assets/Co Average Capital al Assets mmon Stock (%) (% Equity Price. ...

33 questions on Capital Structure, Market value of the firm, stock price, estimated cost of equity, dividends, bonds, working capital, etc: Please see attached ...

... Debt/Assets After-Tax Cost of Debt Cost of Equity Cost of Capital 0% 8% 12% ? 10 8 12 ? ... Debt/Assets After-Tax Cost of Debt Cost of Equity Cost of Capital. ...

... 12.2 Cost of Equity. You wish to calculate the cost of equity for Dell. ... 12.2 Cost of Equity. You wish to calculate the cost of equity for Dell. ...