Question

Countess Corp. is expected to pay an annual dividend of $5.29 on its common stock in one year. The current stock price is $79.83 per share.

The company announced that it will increase its dividend by 3.40 percent annually.

What is the company's cost of equity?

Answer 1

10.03%

Step-by-step explanation:

Using the dividend discount formula, find the cost of equity; r

`r = (D1)/(P0) +g`

whereby,

D1 = Next year's dividend = 5.29

P0 = Current price of the stock = 79.83

g = growth rate of dividends = 3.40% or 0.034 as a decimal

Next, plug in the numbers to the formula above;

`r = (5.29)/(79.83) +0.034\\ \\ r =0.06627 + 0.034\\ \\ =0.10027`

As a percentage, r = 10.03%

Therefore, the company's cost of equity is 10.03%