Question

Question 28 chelsea fashions is expected to pay an annual dividend of $1.10 a share next year. the market price of the stock is $21.80 and the growth rate is 4.5 percent. what is the firm's cost of equity??

Answer 1

As per the dividend distribution model, the cost of equity = D1/P0 + g

where D1 = next year's dividend = 1.10

P0 = Current stock price = 21.80

g =growth rate = 4.5% =0.045

Cost of equity = 1.10/21.80 + 0.045 = 0.095458 = 9.5458% = 9.55%(Rounded)