Question

Endor Incorporated has just paid a dividend of $4.49. The firm's current price on common stock is $34.99. Dividends are expected to grow at a 5% 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 firm's cost of common equity is calculated using the Gordon Growth Model, resulting in a cost of 17.83% when considering a dividend of $4.49, stock price of $34.99, and a dividend growth rate of 5%.

Step-by-step explanation:

To calculate the firm's cost of common equity, we use the Gordon Growth Model (also known as the Dividend Discount Model). This model assumes that dividends will grow at a constant rate indefinitely. The formula is:

Cost of Equity = (Dividend per share / Price per share) + Growth rate of dividends

Given that Endor Incorporated has just paid a dividend of $4.49 and the stock price is $34.99, with dividends growing at in a 5% rate, we can plug these numbers into the formula:

Cost of Equity = ($4.49 / $34.99) + 0.05

Cost of Equity = 0.1283 + 0.05

Cost of Equity = 0.1783 or 17.83%

The firm's cost of common equity, therefore, is 17.83%, rounded to two decimal places.