Question

You are evaluating an investment in John's Market, Inc. The company pays annual dividends and just paid 2.35 on its common stock. The firm will also grow dividends by 3.15 percent annually. If the current stock price is 38.44 per share, what is the company's cost of equity?

Answer 1

The cost of equity for John's Market, Inc. is calculated using the Dividend Discount Model (DDM), and by inputting the given values, we find that the company's cost of equity is 9.26%.

Step-by-step explanation:

To calculate the cost of equity for John's Market, Inc., we can use the Dividend Discount Model (DDM), which is defined by the formula:

Cost of Equity = (Dividend per Share / Current Stock Price) + Dividend Growth Rate

Given the information:

• Annual dividend just paid: $2.35
• Dividend growth rate: 3.15%
• Current stock price: $38.44

Plugging these values into the formula, we get:

Cost of Equity = ($2.35 / $38.44) + 3.15%

Cost of Equity = 0.0611 + 0.0315

Cost of Equity = 0.0926 or 9.26%

Therefore, the company's cost of equity is 9.26%. This reflects the expected rate of return from an investment in John's Market, Inc., which includes the dividend yield and the expected growth in dividends.