Question

Alderaan Incorporated has just paid a dividend of $3.79. The firm's current price on common stock is $69.77. Dividends are expected to grow at a 2% constant rate. What is the firm’s cost of common equity? Give your answer as a percentage, rounded to two decimal places (example: 9.58% as 9.58)

Answer 1

The cost of common equity for Alderaan Incorporated, calculated using the Dividend Discount Model based on a recent dividend of $3.79, a stock price of $69.77, and a growth rate of 2%, is 7.43%.

Step-by-step explanation:

The student is asking how to calculate the cost of common equity for Alderaan Incorporated. This can be computed using the Dividend Discount Model (DDM), which is often used to measure the return that investors expect for investing in a company's stock. The model takes into account the most recent dividend payment, the stock's current price, and the expected constant growth rate of dividends.

To calculate the cost of common equity, we use the formula:

Cost of Common Equity = (Dividend Payment / Current Stock Price) + Dividend Growth Rate

Plugging in the given values:

Cost of Common Equity = ($3.79 / $69.77) + 2%
Cost of Common Equity = 0.0543 + 0.02
Cost of Common Equity = 0.0743 or 7.43%

Therefore, Alderaan Incorporated's cost of common equity is 7.43%.