Problem:
Bouchard and Company hired you as a consultant to help estimate its cost of common equity. You have obtained the following data: D0 = $0.85; P0 = $22.00; and g = 6.00% (constant). The CEO thinks, however, that the stock price is temporarily depressed, and that it will soon rise to $40.00.
Required:
Question: Based on the DCF approach, by how much would the cost of common from retained earnings change if the stock price changes as the CEO expects?
Note: Provide support for your underlying principle.