Question

countess corporation is expected to pay an annual dividend of $4.93 on its common stock in one year. the current stock price is $76.71 per share. the company announced that it will increase its dividend by 3.70 percent annually. what is the company's cost of equity?

Answer 1

The cost of equity for Countess Corporation is approximately 6.41%.

Step-by-step explanation:

To calculate the company's cost of equity, we can use the dividend discount model (DDM). The DDM estimates the present value of future dividends to determine the stock's value. The formula for the cost of equity is: Cost of Equity = Dividend / Stock Price. In this case, the dividend is $4.93 and the stock price is $76.71, so the cost of equity would be approximately 0.0641 or 6.41%.

Answer 2

Using the Gordon Growth Model, the company's cost of equity is calculated to be 10.12% by taking the expected dividend in one year, the current stock price, and the dividend growth rate.

Step-by-step explanation:

The cost of equity for the Countess Corporation can be calculated using the Gordon Growth Model (also known as the Dividend Discount Model). The model expresses the cost of equity (ke) as follows:

ke = (D1/P0) + g

where D1 is the expected dividend in one year, P0 is the current stock price, and g is the growth rate of the dividends.

Given that Countess Corporation is expected to pay an annual dividend of $4.93 in one year and the stock price is currently $76.71 per share, along with a dividend growth rate of 3.70 percent, we can plug these values into the equation to calculate the company's cost of equity:

ke = (4.93/76.71) + 0.037

After doing the math:

ke = 0.0642 + 0.037

ke = 0.1012 or 10.12%

Therefore, the company's cost of equity is 10.12%.