Question

Anle Corporation has a current stock price of $22.12 and is expected to pay a dividend of $0.75 in one year. Its expected stock price right after paying that dividend is $23.89.

a. What is Anle's equity cost of capital?
b. How much of Anle's equity cost of capital is expected to be satisfied by dividend yield and how much by capital gain?

Answer 1

The equity cost of capital for Anle Corporation is calculated using the dividend yield and capital gain yield. The dividend yield is 3.39% and the capital gain yield is 7.98%.

Step-by-step explanation:

The equity cost of capital is the return required by equity investors in order to invest in the company. It represents the opportunity cost of investing in the company's stock rather than in alternative investments with similar risk profiles.

To calculate the equity cost of capital, we can use the formula:
Equity Cost of Capital = Dividend Yield + Capital Gain Yield

a. To determine the dividend yield, we need to divide the expected dividend by the current stock price: Dividend Yield = $0.75 / $22.12 = 0.0339 (or 3.39%).

b. The capital gain yield can be calculated by dividing the expected increase in stock price by the current stock price: Capital Gain Yield = ($23.89 - $22.12) / $22.12 = 0.0798 (or 7.98%).

Therefore, the equity cost of capital for Anle Corporation is 3.39% from dividends and 7.98% from capital gains.