Question

Krell Industries has a share price of $ 22.00 today. If Krell is expected to pay a dividend of $ 0.88 this year and its stock price is expected to grow to $ 23.54 at the end of the​ year, what is​ Krell's dividend yield and equity cost of​ capital? The dividend yield is 4.0​%. ​(Round to one decimal​ place.) The capital gain rate is ___.

Answer 1

Please find the detailed answer as follows:

Step-by-step explanation:

According to the given problem,

Today’sshare price(Po ) = $22

Dividend ofthis year( Do ) = $0.88

Growth rate(g)= 7.7% {since the share price has increased from $22 to $23.54 thegrowth rate is 7.7%}

Calculation of Dividend yield: It is calculated bydividing annual dividend per share by Stock price pe share.

Dividend yield = Annual dividend per share/Stock price pershare

= $0.88/22

= 0.04 or 4%

Calculation of Equity cost of capital: The return thatthe shareholders require on the stock, can be interpreted asfirm’s cost of equity capital. It is denoted withRE. It is calculated as

RE = (D1/Po )+ g

Where D1 is the expected dividend for next year

{D1 = Do X (1+g)= $0.88(1+0.077) =$0.88(1.077) = $0.94}

Po is today’s share price

G is the constant growth rate

Now, substituting the above values in the formula, weget

RE = ($0.94/22) + 0.077

= $0.0427 + 0.077

= 0.1197 or 11.97%

The cost of equity is thus 11.97%