Question

ABC Corp. is expected to pay an annual dividend in the amount of $2.50 a share next year. This dividend constantly grows by 5 percent per year. The current price of the company’s stock is $50.60 per share. What is the cost of equity?

Answer 1

9.94%

Step-by-step explanation:

The cost of equity can be determined from the constant dividend growth model

according to the constant dividend growth model

price = d1 / (r - g)

d1 = next dividend to be paid

r = cost of equity

g = growth rate

50.60 = 2.5 / (r - 0.05)

50.60(r - 0.05) = 2.5

(r - 0.05) = 2.5 / 50.60

(r - 0.05) = 0.0494

r = 0.0494 + 0.05

r = 0.0994

r = 9.94%