Suppose a firm has a beta of 1.5.The market risk premium is expected to be 8%, and the current risk-free rate is 2%. The firm maintains a constant growing dividend policy that grows at 5% per year ; the most recent dividend was $1.8. Currently stock price is $21.

• If you use dividend growth model to estimate cost of equity, D1 is $1.8

• OR

• If you use dividend growth model to estimate cost of equity, D1 is not $1.8