Question

ginger industries stock has a beta of 1.08. the company just paid a dividend of $.85, and the dividends are expected to grow at 4 percent. the expected return on the market is 11.3 percent, and treasury bills are yielding 3.4 percent. the most recent stock price for the company is $72. calculate the cost of equity using the dCF method

Answer 1

The cost of equity for Ginger Industries, calculated using the Dividend Discount Model with a dividend of $0.85, stock price of $72, and dividend growth rate of 4%, is 5.18%.

Step-by-step explanation:

To calculate the cost of equity for Ginger Industries using the Dividend Discount Model (also known as the Gordon Growth Model), we'll need to apply the formula:

Cost of Equity = (Dividend per share / Current stock price) + Dividend growth rate

Given that the company just paid a dividend of $0.85 and the dividends are expected to grow at 4 percent, we can plug these values into the formula:

Cost of Equity = ($0.85 / $72) + 4%

Calculating the above expression gives us:

Cost of Equity = 0.0118 (or 1.18%) + 4%

Cost of Equity = 5.18%

The Cost of Equity for Ginger Industries, calculated using the Dividend Discount Model, is therefore 5.18%.

Note: This calculation does not take into account the company's beta or the expected market return, which are components used in the Capital Asset Pricing Model (CAPM).