Firm Axios has earnings per share of $4, stock price of $32/share and, hence, a P/E ratio of 8 [the P/E ratio is the Price per share divided by the earnings per share] today i.e., T=0. The firms annual dividend for year T=0 has just been paid out (and, therefore, is not reflected in the current stock price of $32). The firms earnings are expected to keep growing at a rate of 6%. The firm follows a policy of always paying 1/2 of its earnings in annual dividends (and reinvesting the rest). Question: What is your estimate of the firms cost of equity capital?

Firm Axios has earnings per share of $4, stock price of $32/ share and, hence, a P/E ratio of 8 [the P/E ratio is the Price per share divided by the earnings per share] today i.e., T=0. The firm's annual dividend for year T=0 has just been paid out (and, therefore, is not reflected in the current stock price of $32). The firm's earnings are expected to keep growing at a rate of 6%. The firm follows a policy of always paying 1/2 of its earnings in annual dividends (and reinvesting the rest). Question: What is your estimate of the firm's cost of equity capital