Question

The Giuntoli Co. just issued a dividend of $2.50 per share on its common stock. The company is expected to maintain a constant 5 percent growth rate in its dividends indefinitely. If the stock sells for $43.30 a share, what is the company’s cost of equity? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Answer 1

The company’s cost of equity is 11.07%

Step-by-step explanation:

The computation of the cost of equity is shown below:

Price = (Current dividend) ÷ (cost of equity - growth rate)

$43.30 = ($2.63) ÷ (cost of equity - 5%)

$43.30 × cost of equity - $43.30 × 5% = $2.63

$43.30 cost of equity - $2.165 = $2.63

$43.30 × cost of equity = $2.63 + $2.165

$43.30 × cost of equity = $4.795

So, cost of equity = 11.07%

where,

The current dividend =

Dividend × ( 1 + growth rate)

2.50 × ( 1 + 0.05) = 2.50 × 1.05 = 2.625