Question

Reliable Electric is a regulated public utility, and it is expected to provide steady dividend growth of 5% per year for the indefinite future. Its last dividend was $6 per share; the stock sold for $50 per share just after the dividend was paid. What is the company’s cost of equity? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

Answer 1

Answer: 17.6%

Step-by-step explanation:

Given that,

Dividend growth(g) = 5% per year

Last dividend = $6 per share

Stock sold (P0) = $50 per share

Expected dividend(D) = Last dividend(1 + g)

= $6 (1 + 5%)

= $6.30

`cost\ of\ equity=(D)/(P0)*100+g`

`cost\ of\ equity=(6.30)/(50)*100+5%`

= 12.6% + 5%

= 17.6%