Question

The Down and Out Co. just issued a dividend of $2.91 per share on its common stock. The company is expected to maintain a constant 6 percent growth rate in its dividends indefinitely. If the stock sells for $35 a share, what is the company's cost of equity?

Answer 1

14.81%

Step-by-step explanation:

Cost of equity = (Dividend for next period / Current price) + Growth rate

Cost of equity = (($2.91*1.06) / $35) + 0.06

Cost of equity = $3.0846/$35 + 0.06

Cost of equity = 0.08813143 + 0.06

Cost of equity = 0.14813143

Cost of equity = 14.81%