Problem: The MacBurger Company 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'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 analysis 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. Please use the dividend valuation model.
$200 million after tax profit
$1/2 of its net after tax income is paid out to holders
100 million shares of stock
Stock sells for 8 times the current earnings
Growth Rate: 7.5% per year'