Question

The Tribiani Company just issued a dividend of $3.10 per share on its common stock. The company is expected to maintain a constant 6.4 percent growth rate in its dividends indefinitely. If the stock sells for $62 a share, what is the company's cost of equity? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Answer 1

Using the Dividend Discount Model, the cost of equity for Tribiani Company is calculated to be 6.50%.

Step-by-step explanation:

When calculating the cost of equity for Tribiani Company, which has recently issued a dividend of $3.10 per share and is expected to maintain a constant growth rate of 6.4 percent, we can use the Dividend Discount Model (DDM).

The DDM is a method used to estimate the cost of equity, which reflects the return a company must offer to attract investors to its stock. To calculate this, we use the formula:

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

Plugging in the values provided:

Cost of Equity = ($3.10 / $62) + 6.4%

Cost of Equity = 0.05 + 6.4% = 6.50%

Answer 2

To calculate the cost of equity for the Tribiani Company, you use the Dividend Discount Model (DDM), resulting in a cost of equity of 6.50%.

Step-by-step explanation:

The student is interested in finding the cost of equity for Tribiani Company using the Dividend Discount Model (DDM), which relates the current price of a stock to its future dividend payments. Given a dividend of $3.10 and a consistent growth rate of 6.4%, when the stock sells for $62, the cost of equity can be calculated as:

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

Cost of Equity = ($3.10 / $62) + 6.4%

Cost of Equity = 0.05 + 6.4% = 6.50%

So, the cost of equity for the Tribiani Company is 6.50% percent.