Question

Cost of Equity: Dividend Growth Summerdahl Resort's common stock is currently trading at $33 a share. The stock is expected to pay a dividend of $1.50 a share at the end of the year (D1 = $1.50), and the dividend is expected to grow at a constant rate of 6% a year. What is the cost of common equity? Round your answer to two decimal places. Answer= __ %

Answer 1

The cost of common equity for Summerdahl Resort is 10.5%.

Step-by-step explanation:

The cost of common equity can be calculated using the dividend discount model (DDM) formula. In this case, the D1 (dividend at the end of the year) is $1.50, and the growth rate (g) is 6%.

Cost of equity = (D1 / Price) + g

Substituting the values, we get:

Cost of equity = ($1.50 / $33) + 0.06 = 0.045 + 0.06 = 0.105 = 10.5%

Therefore, the cost of common equity for Summerdahl Resort is 10.5%.