Question

HighGrowth Company has a stock price of $ 23. The firm will pay a dividend next year of $ 1.19​, and its dividend is expected to grow at a rate of 3.7 % per year thereafter. What is your estimate of​ HighGrowth's cost of equity​ capital? The required return​ (cost of​ capital) of levered equity is nothing​%

Answer 1

Cost of equity = 8.87%

Step-by-step explanation:

Given that,

Stock price = $23

Firm will pay a dividend next year = $1.19

Dividend is expected to grow at a rate = 3.7 % per year thereafter

cost of equity = (Dividend next year ÷ Stock price) ÷ Dividend growth rate

cost of equity = ($1.19 ÷ $23) + 3.7%

cost of equity = 5.17% + 3.7%

cost of equity = 8.87%