Question

Alderaan Incorporated has a current stock price of $78.13. The last dividend was at 2.84, and is 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 is 5.64%.

Step-by-step explanation:

To calculate the cost of common equity for a company, you can use the dividend discount model (DDM) formula. The DDM formula is: Cost of Common Equity = Dividend / Current Stock Price + Growth Rate. In this case, the dividend is $2.84, the current stock price is $78.13, and the growth rate is 2%. Plugging in these values, we get: Cost of Common Equity = 2.84 / 78.13 + 0.02 = 0.0364 + 0.02 = 0.0564.

To convert the result to a percentage, we multiply by 100: Cost of Common Equity = 0.0564 * 100 = 5.64%. Therefore, the firm's cost of common equity is 5.64%.