Question

Last week, Lester's Electronics paid an annual dividend of $2.4 on its common stock. The company has a longstanding policy of increasing its dividend by 4 percent annually. This policy is expected to continue. What is the firm's cost of equity if the stock is currently selling for $42 a share? 11.96% 8.66% 10.05% 9.94% 7.12%

Answer 1

cost of equity = 9.94%

Step-by-step explanation:

we use the gordon dividend growth model to solve for cost of capital

`(divends_1)/(return-growth) = Intrinsic \: Value`

we clear cost of capital

`return = (divends_1)/(stock) + g`

Now, we plug the values into the formula and solve:

we have the last week dividend (t= 0)

we need the dividend of next year so we apply the grow rate

2.4 x 1.04 = 2.496

Stock 42

g = 0.04

`return = (2.496)/(42) + 0.04`

return = 0.099429 = 9.94%