Question

The Down and Out Co. just issued a dividend of $1.94 per share on its common stock. The company is expected to maintain a constant 0.04 growth rate in its dividends indefinitely. If the stock sells for $42.35 a share, what is the company's cost of equity

Answer 1

Cost of equity will be equal to 0.76 %

Step-by-step explanation:

We have given dividend just paid
`D_0=$1.94`

Growth rate = 0.04

So expected dividend for the next year
`D_1=1.84(1+0.04)=$2.017`

Stock price
`p_0=$42.35`

We have to find company cost of equity , that is required rate of return

We know that stock price is given by

`p_0=(D_1)/(R_E-g)`

So
`42.35=(2.017)/(R_E-0.04)`

`42.35R_E-1.694=2.017`

`R_E=0.00762` = 0.76 %