Question

Summerdahl Resort's common stock is currently trading at $28 a share. The stock is expected to pay a dividend of $1.00 a share at the end of the year (D1 = $1.00), and the dividend is expected to grow at a constant rate of 8% a year. What is the cost of common equity? Round your answer to two decimal places.

Answer 1

The cost of common equity for Summerdahl Resort is 11.57%.

Step-by-step explanation:

The cost of common equity can be calculated using the dividend growth model formula.

The formula is: Cost of Common Equity = (Dividend / Current Stock Price) + Dividend Growth Rate.

In this case, the dividend is $1.00 and the current stock price is $28.

The dividend growth rate is 8%.

Using the formula: Cost of Common Equity = ($1.00 / $28) + 0.08

= 0.0357 + 0.08

= 0.1157, or 11.57%.