Question

What would you estimate as to the cost of equity if a stock sells for $40, pays a $4.25 dividend, and is expected to grow at a constant rate of 5%

Answer 1

15.63%

Step-by-step explanation:

Calculation to determine cost of equity

Using this formula

P = D/(r-g)

Where,

P=40

D=4.25

g=0.05

r=?

Let plug in the formula

Cost of equity=40 = 4.25/(r-0.05)

Cost of equity=r = (4.25/40)+0.05

Cost of equity=r =0.1063+0.05

Cost of equity=r =0.1563*100

Cost of equity = 15.63%

Therefore cost of equity is 15.63%