Question

The Tribiani Company just issued a dividend of $2.90 per share on its common stock. The company is expected to maintain a constant 8 percent growth rate in its dividends indefinitely. If the stock sells for $43.70 a share, what is the company's cost of equity? Note: Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16. I Cost of equity %

Answer 1

The company's cost of equity is calculated using the Gordon Growth Model, which equals (Dividends per Share / Current Stock Price) + Growth Rate. Inputting the provided figures, the cost of equity for Tribiani Company is found to be 14.64%.

Step-by-step explanation:

The cost of equity for the Tribiani Company can be calculated using the Dividend Discount Model (DDM), specifically the Gordon Growth Model, since the company is expected to maintain a constant growth rate in its dividends. According to the data provided, the Tribiani Company just issued a dividend of $2.90 per share and expects to grow these dividends at a constant rate of 8% indefinitely. The stock currently sells for $43.70 a share. The Gordon Growth Model formula is given by:

Cost of Equity = (Dividends per Share / Current Stock Price) + Growth Rate
Using the given figures:

Cost of Equity = ($2.90 / $43.70) + 0.08 = 0.0664 + 0.08 = 0.1464 or 14.64%

Therefore, the company's cost of equity is 14.64%.